Overdrafts are poor value for money, says FCA
Overdrafts aren't providing good value for money and consumers are confused about the true cost of them, the Financial Conduct Authority (FCA) has found.
It said that while many consumers quickly come to rely on their overdraft facility, many are unaware about how much they pay if they fall into the red and are confused by the often "high, complex and opaque charges" attached to unauthorised overdrafts.
Many also fail to view an overdraft as actual debt and often see them as an extension of their personal income, with many also failing to actively repay their limit off regularly.
Around 15% of customers with an overdraft facility, between 32 and 40 million accounts according to the FCA, are permanently or usually overdrawn.
While some initiatives such as text alerts for unarranged overdrafts have helped consumers avoid charges, unarranged overdraft limits still carry high charges that are difficult to understand.
This confusion can lead to banks raising additional revenue, and as consumers tend not to switch current accounts on the basis of their overdrafts, there is little incentive for banks to provide good-value overdrafts as well.
Christopher Woolard, director of policy, risk and research at the FCA, said: "Just about everybody who banks can have access to some sort of overdraft facility - whether they've signed up for it or not."
As a result of its findings, the FCA will now investigate how providers set and monitor overdraft limits and will consider making some voluntary measures compulsory for banks later this year.
"The sheer size of this market is huge and with overdrafts bolted on to over 30 million UK current accounts, we want to make sure it is working well for consumers," added Woolard.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.