Overdraft rules has saved consumers £1bn

The Financial Conduct Authority (FCA) says that improved overdraft rules that reduced high fees for unarranged borrowing removed complex charging structures and helped consumers who were repeatedly using their overdrafts.

Rules introduced in April 2020 meant that banks couldn’t charge more for unarranged overdrafts than for arranged ones. They also had to remove high fees and complex charges for unarranged borrowing. This has saved us over £500 million. In December 2019, the FCA introduced rules to force banks to help people repeatedly using their overdraft, saving us £486 million.

The evaluation found that for each customer who had an arranged overdraft or access to an unarranged overdraft saved, on average, £17.40 in charges in 2021 due to the new pricing rules.

The FCA estimates that 30% of consumers living in the most deprived areas in the UK saved £153 million in 2021.

Sheldon Mills, Executive Director, Consumers and Competition at the FCA, said “We know that overdrafts offer a convenient way to help some people manage temporary cash flow issues, but some banks were charging more than 80% APR (Annual Percentage Rate) on arranged overdrafts, once fees and charges were factored in.”

“The action we took to simplify overdraft charges and to tackle high unarranged overdraft fees has saved people across the UK almost £1 billion in total. Such savings are vital as people manage cost of living pressures. We expect banks and building societies to price fairly and support those in difficulty and we encourage consumers to shop around for the best current account to suit their needs.”

“We expect banks to work with customers, who repeatedly use their overdrafts, to help them understand the options available to reduce their reliance on overdrafts.”

The rules on pricing required firms to stop charging fixed fees for overdraft borrowing, to charge no more for an unarranged overdraft than an arranged one, to price overdrafts with a single annual interest rate, and advertise overdrafts with a representative Annual Percentage Rate.

The FCA’s new rules are also aimed at encouraging competition in the market. Firms must also now identify and take action to support customers who frequently use their overdraft, resulting in high cumulative charges that are either harmful to the customer or show that the customer is experiencing or at risk of financial difficulties.

The FCA estimates that consumers will save between £88m and £105m in charges a year from now on due to actions to tackle repeat use.

Overdrafts are intended for short-term or emergency use so consumers should consider other methods of credit if they find they need to borrow for longer.

The FCA has also published examples of good practice and areas of concern by firms, following a review of their strategies to help customers who are repeat users of their overdrafts.

While many of the firms were meeting the FCA’s expectations, gaps were found particularly about how firms monitor and review the effectiveness of their policies and procedures for customers who repeatedly use their overdraft. All firms included in the review will be sent the good practice examples so they can improve where necessary.

Commenting. on the announcement,  Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said “The overdraft crackdown has saved us a small fortune in sky high charges and fees. It also came at the same time as the pandemic, when borrowing fell sharply, which meant millions of people saved even more. There are an awful lot of savings to celebrate, but we can’t get complacent, because borrowing is on the rise again.”

“The rule changes made a significant difference, especially for people who use overdrafts regularly. Before the changes, the cost of an overdraft was horrible – with daily charges and outlandish fees – which fell most heavily on the most vulnerable. On average we paid £4.10 a month for every £100 we borrowed this way – the equivalent of a 62% EAR. Now that charge has been cut to £1.90 – the equivalent of 25%. And because the rates on unarranged overdrafts and arranged ones have been equalised, they fall less heavily on people with problem debts.”

“However, the picture was changed even more dramatically by the onset of the pandemic. In 2017, when the FCA examined the market, 26 million people used overdrafts – including 14 million unarranged overdrafts. By the time it checked it again in 2021 – after millions of people had build up cash deposits during covid lockdowns – only 15 million people used them – including 6 million unarranged overdrafts. During that time, average monthly borrowing had also fallen from £126.50 to £86.50. Current account balances climbed consistently during the pandemic, so fewer people were close to the edge.”

“The damage done by the cost- of-living crisis means this may only be a temporary reprieve. Separate figures from the ONS found that one in four people are now borrowing more than they did a year earlier – rising to one in three among the squeezed middle – aged 30-49. Women are more likely to take this approach than men, with 27% borrowing more compared to 21% of men. And while older people are generally less likely to borrow, the number of those aged 50-64 who are borrowing more than a year ago has hit 21% – the joint highest this figure has ever been. There’s every chance this means more are using their overdraft again.”

“On the upside, at least those who borrow on an overdraft aren’t subject to quite such eye-watering rates as before 2020. However, this doesn’t mean we can afford just to drift into expensive debt. If you know you’re close to the edge, the first step is to make absolutely sure you can’t avoid borrowing and that there are no costs you can cut to keep you in the black. If you urgently need something now that you can’t afford, think carefully about the cheapest and most effective way to borrow.”