The Financial Conduct Authority’s decision to introduce reforms to the overdraft market should help thousands of people from getting trapped in a debt spiral according to Citizens Advice which says it has helped almost 30,000 people with overdrafts last year

Citizens Advice statistics show that overdraft issues overwhelmingly affect socially-disadvantaged people:

  • 2 in 5 had a disability or long-term health condition
  • 2 in 5 had a monthly income of less than £1000
  • 1 in 5 were from a BAME background
  • 1 in 4 were single parents.

In December 2018, Citizens Advice responded to the FCA’s decision to ban unarranged overdraft fees. It also provided evidence to the regulator’s overdrafts consultation in March 2019.

Gillian Guy, Chief Executive of Citizens Advice, said “Overdraft charges can have serious knock-on effects for people’s debt and mental health. These new rules should help thousands of people from getting trapped in a debt spiral.”

“Many people who seek our help with overdraft problems have had trouble understanding the way the fees are calculated. The FCA’s changes will simplify charging structures and lower the cost of these products for consumers.

“If, after these measures are introduced, people still pay over the odds, the FCA should review the need for an interest rate cap to ensure no one is paying back more than twice what they borrowed.”

Eric Leenders, Managing Director, Personal Finance at UK Finance said “The banking industry is committed to helping customers manage their money and we will be working closely with the FCA to implement these rules.”

“The industry is working on a voluntary agreement to make the cost of overdraft borrowing easier to understand for consumers which will be implemented in April 2020. This will build on the range of measures already introduced by the industry, such as text alerts which have been shown to reduce overdraft charges by 25 per cent.”

“Overdrafts can provide a convenient way for customers to smooth their short-term cashflow, and there is a highly competitive market in the UK with over 96 products on offer. We would always urge customers to speak to their bank and arrange an overdraft in advance to ensure payments are honoured.”

Peter Tutton, Head of Policy at StepChange Debt Charity, said “The FCA is absolutely right to point to the harm that getting stuck in expensive repeated overdrafts can cause. Our own research shows that around half our clients have accumulated overdraft debt at the point they turn to us. So while it’s disappointing that the rules prohibiting harmful unauthorised overdraft charges will take a bit longer, we are delighted that the FCA is turning the page on a long standing cause of hardship for struggling households.”

“The challenge now is to make sure the steps to help customers get out of expensive overdraft debt work in practice.”

“In the credit card market, the effectiveness of the remedies required by the FCA is not yet proven in practice. In the overdrafts market we would therefore like the regulator to be more pro-active and fleet of foot in identifying and refining the specific, practical steps banks should be taking to help customers escape the overdraft trap more quickly, and to break the cycle of repeat use of overdrafts.”

Joanna Elson OBE, Chief Executive of the Money Advice Trust, said “The FCA is right to introduce stronger protections for consumers in relation to overdrafts. These measures, including banning fixed charges and higher pricing of unarranged overdrafts, are a welcome step in the right direction and should help reduce costs for people who use this form of borrowing.”

“From what we see at National Debtline, we know that repeated overdraft use is often a sign of financial difficulty. It is right that banks are required to do more to identify and support these customers – getting the right support and advice as early as possible can stop financial problems escalating further.”

“It is now crucial that the FCA monitors these changes closely to help ensure that they do bring costs down. If this is not the case, the regulator needs to act swiftly to introduce a price cap.”

Michael McKee, Financial Services Partner, at global law firm DLA Piper said “The regulator needs to decide what its objectives for consumers are: either to encourage them to be more hands-on or be the backstop. While the policy rationale for this change is based upon economic and competition philosophies, and pressure from consumers to limit the penalties of unplanned overdrafts, it disincentivises sensible money management by bank customers. Therefore, we could see more customers entering into more short-term debt – which is not what the FCA intends.”

Sajedah Karim, UK FS Partner, EY said “The announcement confirms banks will have to fundamentally reassess their pricing structures and considerably increase clarity on the cost of overdrafts.  This will cost the banking industry.  The FCA’s figures show it expects a 96% fall in the charges applied to typical unauthorised borrowing of £100 (from £5 to less than 20p).  This will clearly impact the £2.4bn in revenue that banks receive from arranged and unarranged overdraft fees and charges.   Lowering rates whilst continuing to make existing current account propositions viable will be a difficult balancing act for banks. Notably, the FCA makes no new comment on the future of free banking.”

“Most banks have made changes or have started planning for these changes.  Moving the implementation date from December to April 2020 will be a welcome window in which firms can refine their overall propositions.

“The regulator has been clear about the approach it wishes to take for some time: overall lower costs, better transparency to promote choice, engagement with repeat usage customers, who rely on overdrafts over the long-term and less reliance on revenue from the most vulnerable. The changes are in line with expectations and, as well as delivering a ‘radical package of remedies’, they provide a clear signal on the FCA’s stance on vulnerable customers.”

“Requirements on firms to monitor progress and provide additional information on pricing changes are a further ramp up in expectations. This adds to the operational impact and will need to be carefully managed across the industry to ensure the remedies have the intended results.”

John Crossley, Head of Money at comparethemarket.com, said “Overdraft fees need to be clear, transparent and simple. Providers have a responsibility to ensure that all customers, but especially those who are financially vulnerable, are sufficiently protected so that their situation is not made worse. Any change to make overdraft pricing more transparent is welcome and will allow consumers to fairly compare how much they are going to be charged if they need to use an overdraft facility. Today’s ruling from the FCA will make comparison of personal current accounts much easier for those looking to switch banks, encouraging more competition in the market.”