Fixed fees for overdrafts will be banned under radical new plans unveiled by the financial watchdog.
The Financial Conduct Authority (FCA) says these changes will make overdrafts simpler, fairer, and easier to manage.
Banks and building societies will be banned from charging fixed fees for borrowing through an overdraft – calling an end to fixed daily or monthly charges, and fees for having an overdraft facility.
They will also stop banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts.
The FCA says it is introducing the reforms to fix a “dysfunctional overdraft market”.
The new rules will come into force on 6 April 2020.
The FCA has announced it will also:
- Require banks and building societies to price overdrafts by a simple annual interest rate.
- Advertise arranged overdraft prices with an APR to help customers compare them against other products.
- Issue new guidance to reiterate that refused payment fees should reasonably correspond to the costs of refusing payments.
- Require banks and building societies to do more to identify customers who are showing signs of financial strain or are in financial difficulty, and develop and implement a strategy to reduce repeat overdraft use.
Andrew Bailey, chief executive of the FCA, expects the typical cost of borrowing £100 through an unarranged overdraft to drop from £5 a day to less than 20p day once the reforms are introduced.
He says: “Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, which are often ten times as high as fees for payday loans. 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.”
Gillian Guy, chief executive of Citizens Advice, says: “Overdraft charges can have serious knock-on effects for people’s debt and mental health. These new rules should help thousands of people from getting trapped in a debt spiral.
“Many people who seek our help with overdraft problems have had trouble understanding the way the fees are calculated. The FCA’s changes will simplify charging structures and lower the cost of these products for consumers.
“If, after these measures are introduced, people still pay over the odds, the FCA should review the need for an interest rate cap to ensure no one is paying back more than twice what they borrowed.”
Rachel Springall, finance expert at Moneyfacts.co.uk, welcomed the move but warned consumers to be on the look out for banks hiking fees to recoup losses.
She says: “Consumers would be wise to keep a close eye on their current account tariff and any perks it may offer, because banks and building societies will likely need to recoup their losses caused by the fixed fee ban.
“Over the next few weeks we would expect a few big names to respond to these measures, and when they do, it is highly likely others will follow suit.
"Banking customers will benefit from a ban on fees, but it’s unknown at this stage whether banks will amend other features of an account to make up for the loss in overdraft charges, and that could mean bad news for consumers overall.”