It has been billed as the biggest shake up of bank overdrafts in a generation as the FCA takes aim at what it calls a ‘dysfunctional overdraft market’. So how will these changes affect banks and customers?
Banks have been raking it in from overdrafts for some time. As the FCA says, in 2017 they made £2.4bn from overdraft fees alone with 30% of that coming from unarranged overdrafts. More than half of those overdraft fees came from just 1.5% of customers in 2016 and those people were more likely to come from deprived areas.
The deeper into overdrafts you go the worse it gets. When Lloyds Bank announced new overdraft fees of 1p per day for every £7 charged it was quick to claim that 90% of its customers would be better off. The thing is it was making that up by hitting the remaining 10% with a sledgehammer. Someone who had an overdraft of more than £2,500 would end up being charged £51 a month.
Some people have it even worse. A small but significant proportion of customers would be paying over £100 under this charging regime. In effect the banks were drawing maximum revenue from their poorest customers, trapping them in debt while being able to issue statements saying they were cutting overdraft rates for most people.
It is, then, a sector in need of overhaul and while these changes are a big deal, whether customers will feel it is another thing. The headline takeaway is that banks will not be able to charge higher fees for unarranged overdrafts than arranged. Fixed daily charges will be banned and overdrafts will have to be priced at a clear annual percentage rate. Refused payment fees should correspond to the cost of refusing payment and they must do more to identify customers who are showing signs of financial strain.
Banks will have to take care to ensure they consider the impact of any decisions they make regarding their uses. Among the amendments added were guidelines encouraging banks to identify repeat overdraft users and that they should prioritise more vulnerable customers when setting repeat overdraft use. Before removing an overdraft facility they should consider the impact this might have on the financial health of their customers.
Will this have an affect? Of course it will. The regulations represent a major shakeup of overdrafts and will require banks to make significant adjustments to the way in which they charge overdraft fees. If nothing else, it means the banks are now paying serious attention to an issue which has been overlooked for some time.
Critics will always argue that customers will ultimately bear the brunt. We could see the end of perks and increased fees in some places. Overdrawn customers have been big money earners for banks, and in some extreme cases customers were paying rates which were not far short of payday loans.
The new rules will take effect from April 2020 except for guidance on refused payments which are applied immediately.