Britain’s financial regulator has proposed new rules that will ban banks from charging customers excessive fees for unauthorised overdrafts.
The Financial Conduct Authority wants to ensure the price for an overdraft is a single interest rate with no fixed daily or monthly charges. However, the FCA has decided against a cap on overdraft fees due to concerns banks could challenge such a move in court.
Overdraft fees raked in more than £2.4bn last year with about 30% from unarranged borrowing costs, which in some cases could be 10 times as high as payday lenders’ fees, the FCA said.
The regulator said people living in deprived areas were the most affected by the failings in the high-cost credit market.
In a bid to tackle the issue, the watchdog will tell banks to do more to identify overdraft customers who demonstrate financial struggles and help them to reduce their overdraft balance. Overdraft fees will have to be advertised with the annual percentage rate (APR) under the proposed rules to help customers compare against other loans.
"These changes would provide greater protection for the millions of people who use an overdraft, particularly the most vulnerable,” said Andrew Bailey, chief executive of the FCA.
"It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform.”
The proposals are part of the FCA’s high cost credit review, which was widely expected to lead to a cap on overdraft fees.
UK's largest lenders overhaul overdraft charges ahead of FCA review
Ahead of the review, Lloyds Banking Group PLC (LON:LLOY), Royal Bank of Scotland Group PLC (LON:RBS), HSBC Holdings PLC (LON:HSBA) and Natwest made changes to overdraft fees last year following criticism of high charges by consumer groups and the Competition and Markets Authority.
Lloyds abandoned all existing charges for overdrafts on its accounts, including those at Halifax and Bank of Scotland, in November 2017 and replaced with a single fee of 1p every day for every £7 of overdraft used.
READ: Lloyds announces shake-up of overdraft fees for retail customers
Previously customers with unauthorised overdrafts faced interest payments at an annual rate of 19.89%, a daily charge of up to £10, a monthly charge of £6, and up to £30 a day for unpaid items but those fees have been scrapped.
However, Lloyds said the 1p per £7 overdraft was equivalent to an APR of 52% and would encourage customers who regulatory use large overdraft to switch to a personal loan instead.
RBS and Natwest have introduced a maximum monthly charge of £80 for unauthorised overdrafts.
HSBC removed interest charges on most unarranged overdrafts last year, and instead charges a £5 daily fee, up to a maximum of £80 a month.
Barclays has abolished unauthorised lending since June 2014, meaning customers cannot exceed their overdraft limit unless they get permission for emergency lending.
People shifting overdraft debt to credit cards, analyst points out
Laura Suter, personal finance analyst at investment platform AJ Bell, said unarranged overdrafts are often too easy for people to fall into, with about 19 million people using them each year.
"Someone with a £100 unarranged overdraft at the moment can pay £5 a day in charges, and the FCA plans to reduce this to just 20p a day," she said.
Suter added: “The FCA’s moves to cut the costs of unarranged borrowing and for banks to target those who are constantly in their overdraft should be welcomed. The regulator’s threat of a future price cap in the sector if banks fail to reform is presumably intended to make banks sit up and take action now, rather than face tougher measures in the future.”
However, Suter said people have been increasingly shifting their overdraft to credit cards so the FCA proposals were “by no means a silver bullet to stop the UK’s costly debt problems”.