Radical shake-up of ‘dysfunctional’ overdraft market confirmed by FCA

A radical shake-up to fix the “dysfunctional” overdraft market has been confirmed by the City regulator.

The Financial Conduct Authority (FCA) will press ahead with plans to make the products simpler, fairer and easier to manage for those who go into the red.

The FCA said the changes represent the biggest overhaul to the overdraft market in a generation and the reforms will “fix a dysfunctional overdraft market”.

The plans include stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts.

Fixed fees for borrowing through an overdraft will be banned – calling an end to fixed daily or monthly charges, and fees for having an overdraft facility.

In 2017, firms made over £2.4 billion from overdrafts alone, with around 30% from unarranged overdrafts.

More than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016.

People living in deprived areas were found to be more likely to be impacted by these fees.

In some cases, unarranged overdraft fees can be more than 10 times as high as fees for payday loans, the regulator said.

The FCA has also announced that it is:

– Requiring banks and building societies to advertise arranged overdraft prices with an APR (annual percentage rate) to help customers compare them against other products;

– Issuing new guidance to reiterate that fees for refused payment should reasonably correspond to the costs of refusing payments;

– Requiring banks and building societies to do more to identify customers who are showing signs of financial strain or are in financial difficulty, and develop and implement a strategy to reduce repeat overdraft use.