Credit, Collections & Insolvency News
Two-thirds of consumers (66%) of current account holders are unaware of the Financial Conduct Authority (FCA) changes to overdraft fees, according to new research by comparethemarket.com. The FCA has introduced new rules to make the costs of overdrafts clearer and easier to compare. But two thirds (66%) of customers have no idea these changes are coming into effect. With 52 million active current accounts across the UK, this equates to 17 million people nationwide unaware of potential changes to their personal finances.
From 6th April 2020, new FCA rules mean that banks must charge a simple annual interest for overdrafts, without additional fees and charges. Fixed daily or monthly charges, and fees for having an overdraft facility are banned in a move to make overdrafts simpler, fairer, easier to manage and compare.
The research reveals the extent to which much of the British public is reliant on an overdraft. A survey of over 2,100 UK adults finds that 40% have gone overdrawn in the last 12 months. Despite these incoming changes, consumer awareness remains low; two-fifths of individuals (42%) do not know how much their providers charge in overdraft fees, despite being an average of £377 overdrawn. Additionally, over one quarter (28%) felt that their bank did not clearly explain their overdraft charges to them.
The figures are more pronounced amongst young people – over one in ten (13%) aged between 18 and 24 say they are ‘pretty much always’ in their overdraft, with the average amount owed £448. This equates to over 400,000 young people nationwide who are continually in their overdraft, each of whom will pay over £170 in interest a year on this debt under the new 39.9% rate.
In response to the regulatory changes, a growing number of high street banks have announced a flat fee of 39.9% on all overdraft fees. So far, only Lloyds and challenger banks Starling and Monzo have announced a different percentage which will be tied to customer credit scores. According to the research, over a third (37%) of people believe that the flat rate of 39.9% will end up costing them more money.
John Crossley, Head of Money at comparethemarket.com, said “We are supportive of the FCA’s view that problems in the overdraft market need to be addressed and it is encouraging that steps to protect customers have been taken. However, consumers may be wondering why a lot of high street banks have adopted the 39.9% interest rate – a figure which is almost double the APR of a typical credit card. That many major high street banks have adopted an APR which is even higher than the rate some challenger banks offer to their highest risk customers could suggest that some providers still view overdrafts as a lucrative source of revenue. If you are unhappy with the overdraft fees your bank is charging it is worth finding a more competitive provider or considering a cheaper alternative if you need to take out credit.”