The Financial Conduct Authority’s (FCA) decision to ban unarranged overdraft fees could help thousands of people from staying stuck in debt, Citizens Advice says.

The national charity also says the proposed crackdown on the way interest is charged on “buy now pay later deals” will help the thousands of consumers who are rocked by these shock bills.However, the decision not to cap doorstep loans is disappointing.

In the past 12 months alone, 30,000 people came to Citizens Advice with problems related to bank and building society overdrafts.

The charity’s research found that people with insecure incomes were twice as likely to have paid arranged overdraft fees when compared to those with stable incomes.

It also found more than 1 in 3 people in problem debt paid overdraft fees, compared to just 17% of all UK adults.

Citizens Advice figures also show people who pay unarranged overdraft fees are disproportionately likely to be vulnerable and have other debts.

  • 39% of people with overdraft issues have mental health difficulties, as opposed to 24% of the charity’s usual clients.
  • 51% of people with overdraft issues also have credit, store or charge card debts.
  • 30% of people with overdraft issues are in council tax arrears.

Gillian Guy, Chief Executive of Citizens Advice, said “People who are financially insecure have been punished by unarranged and complicated overdraft fees for far too long. We have long called for a clampdown on these indefensible charges. . It will help the thousands of people who come to see us with overdraft problems from staying stuck in debt.”

“The FCA’s plan to stop the shock of backdated interest in buy now pay later deals is another win for consumers.However, the decision not to cap doorstep loans will leave the people who resort to using this expensive form of high-cost credit exposed to spiralling debt.”

 Eric Leenders, Managing Director, Personal Finance, UK Finance said “Helping customers to manage their everyday finances is a priority for the banking industry and we acknowledge the FCA’s intention to make overdraft pricing simpler and easier to understand. The Personal Current Account market in the UK is highly competitive with over 40 different providers offering hundreds of competitive products. The Current Account Switching Service makes it easy for customers to move their account to get the best deal, with 5.1 million customers having already taken advantage of this service.”

“We recognise the need to support all customers, including those in more vulnerable circumstances and banks provide 8 million free to use Basic Bank Accounts as part of this commitment. The industry also offers a range of measures to help customers better manage their money, including;

  • Text alerts and prompts to help customers avoid unnecessary charges
  • Retry periods for regular payments
  • Fee free buffers for small overdrafts
  • Packaged accounts with fee free borrowing, including Student accounts
  • Mobile Banking to manage your money on the go

“It is important however that individuals are still able to use unarranged overdrafts where appropriate. UK Finance members have been working with the regulator to explore new ways to better identify and support customers with repeat overdraft use. We will consider today’s proposals carefully and continue to liaise with the FCA in the coming months.”

Caroline Siarkiewicz, Head of Debt Advice at the Money Advice Service comments: “We welcome the FCA’s proposals to make overdrafts simpler and more straightforward for customers. Our evidence suggests that of the financially capable behaviours that people exhibit, it is managing credit that can have the greatest impact on their financial wellbeing. Yet we also know that 11.5 million people have less than £100 in savings to fall back on, so it is inevitable that people will use overdrafts to bridge the gap. Unfortunately, this also means paying fees or interest which can spiral.

“The Money Advice Service fully supports further engagement with the sector to ensure consumers are better informed when it comes to managing their money well. We offer a range of helpful advice and information on our website to help people find the right product for them.”

Joanna Elson OBE, chief executive of the Money Advice Trust, the charity that runs National Debtline, said“This is a significant and welcome shake-up of the way overdrafts work, and we are pleased that the FCA is taking strong action to protect consumers.”

“Putting an end to fixed charges and higher pricing for unarranged overdrafts should significantly reduce costs for people who use this form of borrowing.  At National Debtline we see that repeated overdraft use is often a sign of wider financial problems – and the regulator is right to also require banks to do more to identify and help these customers.”

“However, the option of introducing a price cap should remain firmly on the table.  The FCA should set a clear end date at which it will review the impact of these new measures in bringing costs down, and must be prepared to introduce a price cap if required.”

StepChange Head of Policy Peter Tutton said “We are extremely pleased to see the FCA’s plans for robust new rules on unauthorised overdraft charges. These should help to disrupt the toxic “debt spiral” effect that overdrafts can create, trapping people in a persistent cycle of overdraft debt. Requiring firms to intervene earlier and more meaningfully when their customers show repeated use of overdrafts is hugely important, too.

“In a survey of our clients last year, we found that nearly four out of five (79%) of our clients who had used an overdraft were constantly overdrawn in the year before they sought help from us. So while the new measures are very welcome, we think that more work is needed to establish how to reduce reliance on overdrafts in practice, and to understand the link between persistent overdraft use and problem debt.”

Dan Cooper, UK Head of banking and capital markets, EY said “Today’s announcement signals a milestone change in the way banks and customers use overdrafts.  It means banks will have to fundamentally reassess their pricing structure and considerably increase clarity on the cost of overdrafts. 

“Whilst we knew pricing was under scrutiny, it will be surprising to some that the FCA have gone as far as one single interest rate for all customers. While many expected the end to the distinction between authorised and unauthorised charges, the FCA have today announced an end to tiering, where charges change dependent on the amounts overdrawn.

“Clearer pricing structure and use of APR are designed to encourage better customer interaction, enabling easier comparison between overdrafts and over types of lending as well as allowing customers to better compare overdrafts products.”

“The regulator expects banks to proactively speak to customers who are holding expensive short term debt.  It has already made that clear for credit card balances, and today extended that obligation to overdrafts and catalogue debt as it looks to help those in high cycles of debt.”

“These proposals are due to be introduced in December 2019, although the direction of travel has been clear since earlier this year.  Many firms are likely to have already made changes, or started planning, but today’s announcements, focusing on a single interest rate, will require some firms to re-evaluate their plans.”