British banks will be banned from charging customers higher rates for unarranged overdrafts under proposed new rules that the financial regulator said would mark the biggest intervention in the market “for a generation”.
The Financial Conduct Authority is also banning lenders from charging fixed daily fees for borrowing through overdrafts, and will be required to advertise the products in clearer ways including with annual percentage rates to help compare them against other products.
The measures unveiled by the FCA on Tuesday are designed to make overdrafts fairer. While the watchdog says the £2.4bn that banks make annually from overdrafts is a “legitimate” revenue stream, it has concerns over the distribution: currently 1.5 per cent of customers, overwhelmingly from deprived areas, account for 50 per cent of lenders’ unarranged overdraft fees.
“We are proposing to make the biggest intervention in the overdraft market for a generation,” said Andrew Bailey, FCA chief executive. “These changes would provide greater protection for the millions of people who use an overdraft, particularly the most vulnerable.”
However, while dubbing the interventions “radical”, the FCA backed away from curbing “free” banking, where UK lenders do not charge customers for using a simple current account. This leads banks to rely on a small number of indebted accounts for the bulk of their income. Mr Bailey previously signalled that this could be an area for reform.
The FCA said that while Tuesday’s reforms — some of which will not come into force for another year — are unlikely to affect the free-banking model, other wider changes may cause lenders to look at their pricing models, such as the prospect of higher interest rates, and tech companies moving into banking.
There are also concerns that bringing unarranged overdraft fees in line with those levied for arranged overdrafts could prompt banks to raise charges for the latter.
Lloyds Banking Group voluntarily scrapped unarranged overdraft fees last year, but was criticised after some customers with existing arrangements found their charges could increase by up to 150 per cent a month under the new set-up, according to a union representing Lloyds’ staff.
Rachel Reeves, the Labour MP who chairs the business, energy and industrial strategy select committee, said: “Banks must not be allowed to ‘game the system’ and push up the cost of arranged overdrafts to compensate for lost revenue.”
The FCA pledged that it would be on the lookout for banks trying such a strategy.
The watchdog had already proposed several measures to improve transparency in the market that it said would save customers some £200m a year, but on Tuesday it said the market needed more “fundamental” reform after finding that high charges were in effect subsidising well-off customers at the expense of the more vulnerable.
The changes were welcomed by campaigners, who had previously accused the FCA of dragging its heels. Gillian Guy, chief executive of Citizens Advice, said: “People who are financially insecure have been punished by extortionate and complicated overdraft fees for far too long. It will help the thousands of people who come to see us with overdraft problems from staying stuck in debt.”
The overdraft measures are part of a broader effort by the FCA to address what it sees as unfair practices across the high-cost credit sector. Last month it proposed a price cap for “ rent-to-own” retailers such as BrightHouse, following the introduction of similar rules for payday lenders in 2015.
On Tuesday it also confirmed previously-proposed changes to protect customers using catalogue credit, doorstep lending and store cards, and proposed new rules for the fast-growing “buy now pay later” sector.
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