Bank overdraft charges to be clearer

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Banks won’t be able to charge a daily fee for overdrafts, under new plans from the Financial Conduct Authority. What’s changing and will bank overdraft charges be cut?

Bank overdraft charges – what happens now

There are two different types of bank overdraft charges – charges for unarranged overdrafts and charges for overdrafts you’ve arranged with the bank in advance.

Bank charges for arranged overdrafts vary from:

  • A bank charging interest when you’re overdrawn.
  • A bank charging you a daily fee every time you use the overdraft.

Bank charges for unarranged overdrafts vary from:

  • A bank charging interest when you’re overdrawn.
  • A bank charging you a daily fee every time you use the overdraft.
  • A fee for items that have been returned unpaid.

Some banks charge nothing for unarranged overdrafts, others charge a daily fee and/or interest. The fees on overdrafts can add up to £80 a month – even on a relatively small overdraft.

What’s the problem?

The Financial Conduct Authority (FCA) says that the current overdraft market is ‘dysfunctional’. It says that banks made £2.4 billion from overdrafts, with almost a third of that coming from unarranged overdrafts. It also said that fees on unarranged overdrafts can be ten times higher than the cost of a payday loan.

The FCA also found that more than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016.  An absolutely staggering figure.

SAVVY TIP: The FCA also found that only one in five people understood what they were being charged for using their bank overdraft.

What will change?

Today’s announcement is a consultation, so what I’m going to talk about below may be changed, or watered down, before it’s introduced. However, this is what the FCA is proposing:

  • A single interest rate for both arranged and unarranged overdrafts. Banks will only be able to charge interest on overdrafts. They won’t be able to include any daily or monthly charges.
  • A ban on higher charges for unarranged overdrafts. Banks won’t be able to charge more if you go into the red without asking them first. The FCA found that, although banks may incur extra costs for providing an unarranged overdraft, they charged more than the extra costs they incurred.
  • A rule that says overdraft charges will have to be advertised in a standard way. This will make it easier to compare one bank with another.
  • Limiting the amount banks can charge if they return someone’s payment. These fees should be linked to the actual cost the bank incurs.
  • Telling banks to do more to identify overdraft customers who are showing signs of financial strain. Banks should also help them to reduce their overdraft use.

Banks already have to provide online tools so customers can check if they can get a cheaper overdraft with another bank. Banks also have to provide calculators that help customers work out how much they’ll pay in overdraft charges.

SAVVY TIP: The FCA said it had considered introducing a price cap for overdrafts, but decided against this. Why? Because it thought that banks would end up charging the maximum they could and that those with lower charges might increase the cost of their overdrafts until they reached the cap (why doesn’t that surprise me?). However, the FCA did say it would keep an eye on the banks and would consider introducing a price cap if the measures it’s proposing today don’t work.

When will bank overdraft charges change?

The FCA is consulting on its current plans. If you want to respond to the consultation, you can email: cp18-42@fca.org.uk by March 18th. The FCA will then publish its final rules in the summer of 2019. Banks would be expected to change their charges by December 2019.

Useful links:

If you want to read the full document about bank overdraft charges (all 215 pages of it!), you can do so on the FCA website.

Photo by Robert Bogdan from Pexels

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