New rules to make overdrafts easier to manage have come into force.
The changes brought in from Wednesday by the Financial Conduct Authority (FCA) mean that someone’s “available balance” or “available funds” can no longer include their overdraft.
The measures make it clearer that overdrafts are a form of credit rather than a customer’s own money – and also help to tackle confusion that may lead consumers to accidentally dip into their overdraft.
The changes are part of a wide-ranging shake-up of overdrafts, which from April 6 2020 will also see new pricing rules introduced.
From April 6, banks and building societies will be stopped from charging higher prices for unarranged overdrafts than for arranged overdrafts.
Fixed fees for borrowing through an overdraft will also be banned next year.
And banks and building societies will be required to advertise arranged overdraft prices with an APR (annual percentage rate) to help customers compare them against other products.
Some providers have already been announcing new single overdraft charges as they prepare to comply with the rules coming into force next year.
Nationwide Building Society introduced a blanket rate of 39.9% across its adult current account range in November – and HSBC, First Direct and M&S Bank will impose the same rate from March 14 2020 – leading some commentators to say that being charged 40% to go in the red could become “the new normal”.
Some people who stick within their authorised limit, but spend long periods being heavily overdrawn, could find they end up paying more in charges, while those who sometimes slip into an unauthorised overdraft, or who do not go overdrawn very often or by very much, may find they pay less.
Around 14 million people use an unarranged overdraft each year.
The FCA expects to see the cost of borrowing £100 through an unarranged overdraft fall from a typical £5 per day to under 10p per day.
A typical arranged overdraft user uses it to borrow less than £250 for seven days each month.
The charges from mainstream banks and building societies for this overdraft, before the FCA’s intervention, ranged from just over 80p per month to just under £7 per month.
The complexity of different banks’ overdraft charging structures has made it hard for customers to understand how much they would pay.
Going forward, a £250 overdraft over seven days could cost around £1.65, assuming the bank prices it at 39.9%.
If a customer uses a £1,000 arranged overdraft all month, and an unarranged overdraft of £100 for five days, they could be charged around £40 to £60 per month by some providers.
But if the bank or building society charges at 39.9% this would cost around £30.
From July 2020, the FCA will also require firms to publish a range of overdraft pricing details to highlight the charges people are paying.