UK banks are facing a significant hit to revenues after the Financial Conduct Authority said it was considering a ban on charges for unarranged overdrafts.
Lloyds Banking Group PLC (LON:LLOY) earlier this month warned that it would lose revenue on its plans to get rid of unarranged overdraft fees from November across the group, including Halifax and Bank of Scotland. The bank currently takes about £300mlm a year in fees that will now be abandoned.
Barclays had perhaps anticipated a crackdown by the UK watchdog on overdrafts well before many of its peers, stopping unauthorised lending in June 2014. Customers cannot exceed their overdraft limit unless they obtain permission for emergency funds.
Royal Bank of Scotland PLC (LON:RBS) and NatWest only last week introduced a £80 maximum charge for unauthorised overdrafts.
HSBC Holdings PLC (LON:HSBA) plans to remove interest charges on most unarranged overdrafts but will still charge a £5 daily fee, up to a maximum of £80 a month.
Other banks charge about £6 a day or up to £90 a month.
The changes come after the Competition and Markets Authority ruled that banks must cap their monthly maximum charges on unauthorised overdrafts by the start of August.
Overdraft fees potentially harmful to consumers, FCA says
The FCA is now looking to intervene after its latest review of the UK’s high-cost credit market found that overdraft fees are potentially harmful to consumers.
The City regulator said it has clear concerns about high-cost credit products after the Bank of England warned last month about a rapid build-up in consumer borrowing. It believes that “fundamental changes in the way that unarranged overdrafts are provided may be necessary”.
“High-cost credit products remain a key focus for us because of the risks they pose to potentially vulnerable customers,” said FCA chief executive Andrew Bailey in a statement today.
Bailey added that unarranged overdraft fees were often "significantly higher" than payday loans and that the nature and extent of the problems in this form of credit meant that “maintaining the status quo is not an option”.
According to consumer group, Which?, banks are charging consumers more than 12 times the cost of a payday loan for an unarranged overdraft.
The FCA will spend the next eight months reviewing what action it will take on the issue. An outright ban on unarranged overdrafts is just one of the options being considered.
Other options include a cap on charges or demand for affordability checks before lending money.
The watchdog acknowledged that there were some benefits of consumers having the flexibility to borrow above agreed levels and said it would aim to develop a solution that addresses the harmful effects of overdraft fees while keeping the useful aspects of the market.
The CMA has said that about a fifth of current account holders in the UK have unarranged overdrafts, which generated about £1.2bn of revenues for banks in 2014.
Bank of England warns on rapid consumer credit growth
Consumer credit growth accelerated in the lead up to last year’s Brexit vote and has remained at a double-digit level for over a year.
The Bank of England is particularly worried about lending for car purchases, which has fuelled the expansion in consumer credit sector and has gained at 15% a year. Consumer credit is rising at a rate of about 10% per year, outpacing the 2.3% rise in household income.
Data provided by the BoE today showed lending, including vehicle finance, personal loans and overdrafts, increased 10% year-on-year in June to £1.5bn.
The Bank last week raised the capital buffer on UK lenders amid concerns about consumer lending. It lifted the counter-cyclical capital buffer (CCB) to 0.5% from zero and said British banks must now hold £5.7bn as an additional protection against bad times such as the potentital impact of Brexit.