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FCA takes important steps to making overdrafts fairer

18 December, 2018

We're pleased that the Financial Conduct Authority has today announced robust measures to ensure that consumers stuck in overdraft debt are given more help, and charged less penal rates.

Previous FCA findings suggest 30% of overdraft revenue comes from unauthorised overdraft use and that overdraft fees can cost as much as ten times the fees on payday loans, and with our charity estimating an estimated 2.1 million people spending their whole year in overdraft, change is overwhelmingly needed and very welcome.

In the first half of this year, just under half (47%) of StepChange clients had an overdraft at the time they contacted the charity, and overdrafts were the second most commonly held consumer credit debts after credit cards. Their average overdraft debt was £1,523.

In its feedback statement to the consultation paper published in May on overdrafts, the FCA today says that it plans to:

  • Require banks to align arranged and unarranged fees, effectively banning additional fees for unarranged overdrafts
  • Require banks to price overdraft fees using a single monthly interest rate expressed in APR to increase transparency and competition
  • Require banks to intervene when they identify persistent overdraft debt to help customers reduce their reliance on overdrafts
  • Not set a monthly price cap, which the FCA argues could have unintended consequences, but the FCA expects prices to fall as a result of competition from more transparent costs.

Commenting on the planned new rules, StepChange Head of Policy Peter Tutton said:

“We are extremely pleased to see the FCA’s plans for robust new rules on unauthorised overdraft charges. These should help to disrupt the toxic “debt spiral” effect that overdrafts can create, trapping people in a persistent cycle of overdraft debt. Requiring firms to intervene earlier and more meaningfully when their customers show repeated use of overdrafts is hugely important, too.

“In a survey of our clients last year, we found that nearly four out of five (79%) of our clients who had used an overdraft were constantly overdrawn in the year before they sought help from us. So while the new measures are very welcome, we think that more work is needed to establish how to reduce reliance on overdrafts in practice, and to understand the link between persistent overdraft use and problem debt.”

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