Radical plans to overhaul how banks charge customers for overdrafts – including stopping firms charging higher prices for unarranged borrowing – have been proposed by the City regulator.
The Financial Conduct Authority (FCA) will also ban fixed fees for borrowing through an overdraft and make charges simpler to understand under its proposals.
The watchdog described the plans as the biggest shake-up to the overdraft market in a generation.
In 2017, firms made more than £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 are more likely to be affected by these fees and in some cases unarranged overdraft fees can be more than 10 times as high as fees for payday loans, the FCA said.
The FCA said the changes it is proposing include:
– Ensuring the price for each overdraft will be a simple, single interest rate – with no fixed daily or monthly charges;
– Tackling the highest costs in the market by stopping firms from charging higher prices when customers use an unarranged overdraft;
– Banning fixed fees for borrowing through an overdraft;
– Mandating that arranged overdraft prices must be advertised in a standard way, including an APR (annual percentage rate) to help customers compare them against other products;
– Telling banks to do more to identify overdraft customers who are showing signs of financial strain or are in financial difficulty, and to help them to reduce their overdraft use.
Andrew Bailey, chief executive of the FCA, said: “Today we are proposing to make the biggest intervention in the overdraft market for a generation.
“These changes would provide greater protection for the millions of people who use an overdraft, particularly the most vulnerable.
“It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform.
“We are proposing a series of radical changes to simplify the way banks charge for overdrafts and tackle high charging for unarranged overdrafts.
“These changes would make overdrafts simpler, fairer, and easier to manage.”