Regulator Promises Overhaul of ‘Dysfunctional’ Overdrafts Market

The financial services sector’s regulator has promised to introduce a variety of rule changes that are designed to better protect consumers who find themselves in debt and facing fees in relation to their bank or building society overdrafts.

The Financial Conduct Authority (FCA) has said it is aiming to radically overhaul what it considers to be a “dysfunctional” overdraft market.

According to the organisation, the incoming rules will represent the “biggest overhaul to the overdraft market for a generation”, with expectations currently that the cost of borrowing £100 via an overdraft will fall from around £5 per day to roughly 20 pence per day from next year.

The new rules are set to come into effect as of April 2020, with a key change being that banks and building societies will no longer be able to charge more for unauthorised overdraft use than for authorised overdraft use.

Fixed fees on borrowing via overdrafts will also be banned, with service providers soon to be obliged to price their overdrafts based on a “simple annual interest rate”, the FCA has said.

Following the introduction of the new rules, banks and building societies will also need to advertise their arranged overdraft prices along with an APR figure to help consumers understand more clearly what costs are potentially involved in using those products.

The FCA is also planning to insist that banks and building societies do more to identify and help people who clearly show signs of significant financial strain and who repeatedly resort to the use of overdrafts.

“Our radical package of remedies will make overdrafts fairer, simpler and easier to manage,” said Andrew Bailey, the FCA’s chief executive.

“The decisive action we are taking today will give greater protections to millions of people who use an overdraft, particularly the most vulnerable,” he said.

Mr Bailey went on to point out that vulnerable consumers tend to be more likely to find themselves facing high charges in relation to overdrafts.

He added that charges associated with unarranged overdrafts have made them an extremely expense way to borrow money and can even involve fees being charged at 10 times the rates linked to payday loans.

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