The FCA is cracking down on overdraft fees to protect vulnerable customers

The Financial Conduct Authority (FCA) has taken aim at overdraft fees in the latest part of its high-cost credit review.

The financial watchdog has announced proposals to halt banks from charging higher rates on unarranged overdrafts, a practice that has raked in £720 million in 2017.

Overall, £2.4bn was paid on overdrafts alone that year while more than 50 per cent of unarranged overdrafts came from just 1.5 per cent of customers in 2016.

For some of the UK’s most vulnerable borrowers, slipping into overdraft can lead to mounting charges and fees that can see them slip further into financial peril.

Our changes will make overdrafts simpler, fairer and easier to manage #faircredit pic.twitter.com/Ca0G97sP1k

— Financial Conduct Authority (@TheFCA) December 18, 2018

That’s why the FCA has also pledged to lock each overdraft to a single interest rate, scrapping fixed daily or monthly charges.

And it also plans to introduce measures to ensure that overdraft prices are advertised in a standard way using APR to allow customers to compare more easily.

Banks will also be required to do more to help customers showing signs of financial difficulty reduce their overdraft use.

“Today we are proposing to make the biggest intervention in the overdraft market for a generation,” said FCA chairman Andrew Bailey.

“These changes would provide greater protection for the millions of people who use an overdraft, particularly the most vulnerable.  It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform.”

Citizens Advice has praised the move after their research found that 30,000 people contacted them in the last 12 months about bank and building society overdrafts.

It also found that one in three people in problem debt paid overdraft fees, compared to just 17 per cent of all UK adults.

Today @TheFCA announced it will ban unarranged overdraft fees. This could mean thousands of people will no longer get stung by shocking fees pic.twitter.com/WihF4TC7xs

— CitizensAdvice (@CitizensAdvice) December 18, 2018

However, Gillian Guy, chief executive of Citizens Advice, has called for a cap on doorstep loans to stop people from turning to unscrupulous high-cost lenders.

“People who are financially insecure have been punished by unarranged and complicated overdraft fees for far too long,” she said. “We have long called for a clampdown on these indefensible charges. It will help the thousands of people who come to see us with overdraft problems from staying stuck in debt.”

We're pleased that @TheFCA has announced robust measures to ensure that consumers stuck in overdraft #debt are given more help. With an estimated 2.1 millions people spending the whole year in #overdraft, change is overwhelmingly needed and very welcome https://t.co/es65UD6gD4

— StepChange (@StepChange) December 18, 2018

Debt charity StepChange found that just under half (47 per cent) of their clients had an overdraft at the time they contacted the charity with the average overdraft debt amounting to £1,523.

“We are extremely pleased to see the FCA’s plans for robust new rules on unauthorised overdraft charges,” said head of policy Peter Tutton. “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.”