Credit, Collections & Insolvency News
The Financial Conduct Authority (FCA) has requested further information about overdraft pricing from lenders.
The FCA says over the past few days there has been significant comment about many headline overdraft rates, and in particular that major banks have aligned overdraft rates around 40 per cent.
The FCA study into the overdraft market concluded that it was dysfunctional. In particular, consumers found it very difficult to understand what charges they were paying and charges for unarranged overdrafts were very high, regularly 10 times the cost of a payday loan. These charges fell heavily on consumers who are vulnerable. The market reforms have ended high unarranged charges, saving typical borrowers up to £55 per month on an unarranged overdraft of £100 over 7 days.
Confusing fees and charges have been banned, and the cost of overdrafts has been made more transparent. For many occasional borrowers, the removal of fees means they will pay less even though their headline rate of borrowing may increase. Major banks and building societies have now released their new rates – with most setting very similar prices.
The FCA has been in regular contact with the major banks and has now written to ask them to provide evidence of how they have arrived at their pricing decisions.
The FCA says that they are also being clear and expects firms to take positive steps to help customers who may be worse off or in financial difficulties as a result of these changes. We have asked to see their plans for how they are dealing with the most affected customers.
The FCA expects banks to take steps to support them, for example, firms could reduce or waive interest, offer a continuation of overdraft borrowing at current rate of interest, or agree a repayment programme – including a personal loan.
Overdrafts are not designed to be used for large amounts for long periods of time. People who need to borrow for a longer time may find that other methods of credit are more suited to their needs and maybe more cost-effective.
Peter Tutton, StepChange Debt Charity Head of Policy, said “We welcome this step from the FCA. The new rules on overdraft charges are absolutely necessary to end a longstanding cause of harm to the most financially vulnerable customers. But the FCA now need to be watchful that banks do not perpetuate unfairness or financial harm in another form. It is important that consumers see the new pricing as fair and competitive; and the FCA needs to be sure that the repeat use rules are effective in preventing more people from getting trapped in a cycle of expensive and harmful overdraft debt.”
Gareth Shaw, Head of Money, Which?, said “The changes introduced to provide clarity on overdraft fees and charges, and protect the most vulnerable, must also allow customers to shop around. The current lack of competition on overdraft pricing is disappointing, so it is right the regulator is taking a closer look.”
“Banks should also be clear on how they are communicating the changes to customers and helping more of them choose the right type of credit product for their circumstances.”