The Financial Conduct Authority (FCA) have recently announced the new rules for banks and building societies regarding regulations for overdraft fees. These new regulations will be effective from the 6th April next year (2020), and are said to be the biggest “shake-up” in overdraft financial regulations of this generation, implemented to make overdrafts “simpler, fairer, and easier to manage.”
These new rules will mean that both banks and building societies will be restricted from charging fixed routine (daily/monthly) fees on the overdrafts they offer. Alongside this, overdraft fees will not be allowed to increase when account holders go over their unplanned overdrafts, and banks will only be able to charge a simple interest rate on their overdrafts per annum; with this rate having to be displayed clearly and obviously for any and all potential applicants.
It has been brought to the public’s attention that one of the main issues with the unplanned overdraft rates is the lack of clarity in information on the various different overdraft fees.
The cost of unauthorised overdraft fees can sometimes be as much as £80 to £100 for every £100 borrowed, making it the most expensive form of loan available and almost four times higher than payday loans, according to Payday Bad Credit.
Chief Executive of the FCA Andrew Bailey has commented on this, stating that “this area of lending was “dysfunctional”, and that “Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges, that are both a result of and driver of poor competition”.
Bailey claims that “The decisive action we [the FCA] are taking today will give greater protections to millions of people who use an overdraft, particularly the most vulnerable.”
Although these changes will restrict charges from increasing when account holders go over their planned overdraft limit, there will be no caps to the costs. These new regulations will also require banks to be more vigilant in identifying, and further helping, those who are shown to be financially struggling.
These new regulations have been the reaction from the FCA’s recent research into UK overdrafts. The results for this investigation showed that in 2017, banks and building societies made around £2.4 billion from their overdraft plans, with 14 million people going into an unplanned overdraft per annum. 30% of this £2.4 billion revenue was generated from fees applied to unplanned overdrafts.
Key figures in this industry, such as UK Finance’s Eric Leenders, has responded to the FCA’s announcement for the implementation of these new regulations, claiming that “Overdrafts can provide a convenient way for customers to smooth their short-term cash-flow, and there is a highly competitive market in the UK. The banking industry is committed to helping customers manage their money and we will be working closely with the FCA to implement these rules.”
These new regulations will aim to prevent unjustly high fees from being applied to overdrafts, and subsequently reducing the amount of debt suffered by those throughout the country. It has been claimed that some of the overdraft charges on unplanned overdrafts are actually greater than those of pay-day loans. Therefore, by reducing the risks of people falling into such staggering rates through their unplanned overdraft, the FCA could reduce the amount of debt suffered by the UK a considerable amount.