The UK financial regulator has introduced a series of reforms set to change the face of overdraft fees.
Under the new rules set to apply by April next year, banks won’t be allowed to charge fixed daily or monthly fees for overdrafts.
The Financial Conduct Authority (FCA), which first announced the new measures in December, said it will also ban charging more for unarranged overdrafts than for arranged ones – but those charges will also be uncapped.
Banks and building societies will instead have to apply an annual interest rate on all overdrafts – which must be clearly displayed on all advertisements, to make it easier for consumers to pick the right deal for them.
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The FCA said that the changes will make overdrafts “simple, fairer, and easier to manage” and should protect more vulnerable consumers in particular.
An unarranged overdraft of £100 typically costs around £5 a day, but will be reduced to less than 20p a day when the new rules are brought in.
Peter Tutton, head of policy at debt charity StepChange, says: “The FCA is absolutely right to point to the harm that getting stuck in expensive repeated overdrafts can cause. Our own research shows that around half our clients have accumulated overdraft debt at the point they turn to us.
“So while it’s disappointing that the rules prohibiting harmful unauthorised overdraft charges will take a bit longer, we are delighted that the FCA is turning the page on a long standing cause of hardship for struggling households.”
Banks made nearly £2.5bn from overdrafts alone in 2017.
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Banks will still be allowed to refuse a payment if a customer’s bank balance won’t cover it but the resulting fee must reflect the cost to the bank.
The financial watchdog also said banks must do more to identify and support customers under financial strain, much like the Commission for Customers in Vulnerable Circumstances told the UK energy sector last week.
Sutton added: “The challenge now is to make sure the steps to help customers get out of expensive overdraft debt work in practice.
“In the credit card market, the effectiveness of the remedies required by the FCA is not yet proven in practice. In the overdrafts market we would therefore like the regulator to be more pro-active and fleet of foot in identifying and refining the specific, practical steps banks should be taking to help customers escape the overdraft trap more quickly, and to break the cycle of repeat use of overdrafts.”