FCA Consultation And Policy Statement On Overdrafts

At the end of last year, the FCA published a consultation paper and policy statement on its proposed reforms to the way banks charge for overdrafts. This forms part of the regulator's overall review of the consumer credit market; following previous interventions on high-cost short-term credit, rent-to-own and credit cards.

Summary

The table below sets out a summary of the FCA's proposed measures for the overdraft market:

  1. Alignment of arranged and unarranged overdraft charges - preventing firms charging higher prices for unarranged overdrafts than arranged overdrafts 2. Overdrafts to be subject to a single interest rate only - banning daily or monthly fixed charges 3. Overdrafts to be advertised in a standard way - including an Annual Percentage Rate (APR) to help customers compare against other products 4. Discouraging repeat use - requiring firms to develop a strategy to reduce repeat use of overdrafts 5. Consumer awareness - requiring firms to provide online tools that assess eligibility for overdrafts 6. Consumer engagement - improving the information displayed on overdrafts - requiring an online calculator so customers can check the costs of overdrafts and help consumers understand how overdrafts work 7. Warning of overdraft use - firms to notify consumers via text message warning them of unexpected overdraft use 8. Clarifying the line between credit and consumer funds - ban from including the overdraft amount in the calculation of "available funds". The FCA plans to publish its final rules in early June and intends for the rules to come into force in early December. The rules set out under the policy statement were originally intended to come into force on the 18th December but the FCA is aligning this with the consultation paper proposed implementation date of early December.

Background

52 million people in the UK have a personal current account. The FCA estimates that 36% use an arranged overdraft whilst 26% use an unarranged overdraft each year. The revenue from such overdrafts in 2017 was £2.4bn (30% of which originates from unarranged overdrafts despite unarranged overdrafts only accounting for 4% of all overdraft balances). The FCA is concerned that consumers use overdrafts over prolonged periods and that this form of debt may not be the best form of borrowing for them. The FCA has found that unarranged overdrafts cause financial detriment to vulnerable consumers in particular.

Pricing Interventions

The FCA is concerned...

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