Ban on overdraft fixed fees planned by regulator in a "radical" crackdown on banks' punitive charges

18 December 2018
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Banking customers will no longer be shown daily or monthly fees for overdrafts in a new crackdown by the financial regulator the Financial Conduct Authority (FCA).

Instead, customers of banks will only ever be presented with a rate of interest to explain the cost of their overdrafts.

The regulator says by forcing banks to all present overdraft cost information in the same way, consumers will be able to better compare different banking products as pricing will become standardised across the industry.

The FCA says it will stop providers from charging higher prices to customers using unarranged overdrafts.

It will also issue guidance that refused payment fees should correspond to refused payments and that banks should explain the costs that are included.

The regulator has also ordered banks to do more to identify customers under financial strain and help to reduce the usage of overdrafts where possible.

Andrew Bailey, chief executive of the FCA says: “Today we are proposing to make the biggest intervention in the overdraft market for a generation.

“These changes would provide greater protection for the millions of people who use an overdraft, particularly the most vulnerable. It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform. 

In 2017, banks made £2.4 billion from overdrafts, with 30% of this coming from unarranged overdrafts alone.

The watchdog says in 2016 more than half of banks’ unarranged overdraft fees came from just 1.5% of its customers.

Mr Bailey adds: “We are proposing a series of radical changes to simplify the way banks charge for overdrafts and tackle high charging for unarranged overdrafts. These changes would make overdrafts simpler, fairer, and easier to manage.”

The end of free banking

Financial commentator Andrew Hagger of Moneycomms thinks the changes to overdrafts are good, but worries the days of free bank accounts could be numbered as a result.

He says: "The banning of fixed fee overdrafts is long overdue as they are simply punitive, particularly for those who borrow short term or relatively small amounts.

"The banks have tried to claim that fixed fee charging is easier for customers to understand - that might be so but such 'transparency' comes at a huge cost for the borrower.

"Forcing all banks to go back to using a simple interest rate tariff is an excellent move by the FCA and will allow people to compare the cost against rival banks.

"It will be interesting to see how the banks react - will they charge sky high interest rates for overdrafts, instead of hiding behind complex tariffs or will they look to recoup lost revenue by charging monthly fees for all current account customers? - the end of free banking could become much more of a reality because of this move."

The FCA has now opened a consultation on these measures which will continue until 18 March 2019.

Comments

In reply to by anonymous_stub (not verified)

Another way to encourage people to live above their means, if no fixed penalties the interest rate for unapproved overdraft should be very high, they are spending other peoples cash without permission, THEFT. Why not apply for a small approved overdraft or get a low balance credit card, used properly you can purchase on credit card so you never go overdrawn, as soon as you receive wage or benefit the first thing is to clear credit card then start again. That way you should never go overdrawn and get a free buffer loan every month provided you control yourself. Credit should be made harder to obtain especially if you have ever failed to stick to the agreement.

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