Credit, Collections & Insolvency News
Banks have been urged by debt charity StepChange ‘not to shroud their repeated-overdraft use strategies in mystery’. With new rules on overdraft repeat use starting today (18th December 2019), the charity says that banks will need careful oversight by the Financial Conduct Authority (FCA) to ensure they break the cycle of financially vulnerable people getting trapped in disproportionately expensive, repeat overdraft use.
The new rules changes brought mean that someone’s “available balance” or “available funds” can no longer include their overdraft. The measures make it clearer that overdrafts are a form of credit rather than a customer’s own money – and also help to tackle confusion that may lead consumers to accidentally dip into their overdraft.
From 6th April 2020, banks and building societies will be stopped from charging higher prices for unarranged overdrafts than for arranged overdrafts. Fixed fees for borrowing through an overdraft will also be banned next year. Banks and building societies will be required to advertise arranged overdraft prices with an APR (annual percentage rate) to help customers compare them against other products.
StepChanges says that these rules will also need close FCA monitoring.
Overdrafts are a common and potentially expensive sources of credit use. Among StepChange clients, 46% of people who were helped by the charity in the first half of 2019 had an overdraft, with an average outstanding balance of £1,483. According to the FCA, 14% of consumers used their overdraft every month in 2016, paying 69% of the total of all arranged, unarranged and refused payment overdraft fees. This is one of the reasons why the FCA has intervened to require banks to develop strategies to reduce the repeated use of overdrafts.
Under the new rules, banks must provide the FCA with details of their strategy when the rules start to apply, must monitor progress, and report on the outcome of their monitoring after 6 and 12 months, including details of any change to the total number of repeat users, the total size of their overdraft balances and any other relevant background information. However, there is no requirement for this information to be made publicly available.
StepChange Debt Charity Head of Policy Peter Tutton said “The FCA’s new rules are welcome, yet shrouded in mystery at individual firm level. We would urge banks to make public their repeat use strategies, and the FCA to make public the findings of its monitoring. This is important both so that individual consumers know where they stand, and so that public scrutiny is possible of whether firms are engaging with the spirit as well as the letter of the rules.”
“Overdraft debt is very common and can be very expensive – often more than the cost of a payday loan. Helping people to reduce repeated, expensive overdraft use is a significant step in reducing the vicious cycle under which the more financially vulnerable you are, the more expensive it is for you to use financial services, potentially pushing you even further into financial difficulty.”
Gareth Shaw, Head of Money, Which?, said “These important changes will give consumers more clarity about their finances and should help them make informed spending decisions and avoid going into the red.”
“We hope to see more banks now coming forward with competitive overdraft pricing and for the regulator to ensure that its transformation of current account overdrafts delivers for customers.”
