Impending overdraft changes heralded most significant in a generation. Is your overdraft at risk?
The UK financial regulator, the Financial Conduct Authority (FCA) has announced that in June this year, they will announce new rules that will change how consumers pay for their overdrafts.
The rules they are promising will be the most significant in a generation for the overdraft market and will provide benefits for the millions of consumers, particularly those who are the poorest.
When the FCA makes such announcements, they need to be taken seriously, as previous interventions by them into how payday lenders and rent to buy providers charge interest, has significantly changed the face of those financial markets.
Why does the FCA have overdrafts in their crosshairs?
The reason the FCA have overdrafts in their crosshairs is that research has revealed some startling facts:
- First, more than 50% of all unarranged overdraft fees come from just 1.5% of bank customers.
- Second, the FCA found that people in deprived areas pay almost twice as much as those not living in deprived areas in overdraft fees (this is known as the poverty premium, which means the poorest in society pay the most for services).
- Third, 69% of all overdraft fees come from customers who use their overdrafts every month, suggesting the majority of fees are being paid by consumers who have become overdraft prisoners.
- Finally, 80% of all bank customers cannot choose the most affordable overdraft deal.
They also found that some unarranged overdraft fees are costing some consumers as much as 10% per day, or in some cases as much as 20%.
What changes could be introduced?
The FCA is proposing that banks will need to do more to identify those consumers who are using their overdrafts and showing signs of financial distress. The banks will also be required to help those consumers.
They will also be required to produce strategies that will reduce repeat use and be required to monitor the effectiveness of those strategies.
It is also possible banks will be banned from charging fixed fees for overdrafts and have to adopt a single rate of interest for all overdrafts.
Authorised v Unauthorised Overdraft Fees
Significantly, the days of banks differentiating being authorised and unauthorised overdrafts may be over, with the higher level of fees that are normally applied to unauthorised overdrafts being banned.
Banks are also likely to be required to provide clearer information about their overdraft fees and also provide online calculators, so customers can see how much they will be charged if they use their overdraft.
The practice of showing overdrafts as available funds is also likely to end.
Speaking about the proposals, Andrew Bailley, Chief Executive of the Financial Conduct Authority, has said:
“High-cost credit is used by over three million consumers in the UK, some of whom are the most vulnerable in society. The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer.”
‘…we are proposing to make the biggest intervention in the overdraft market for a generation. These changes would provide greater protection for the millions of people who use an overdraft, particularly the most vulnerable. …We are proposing a series of radical changes to simplify the way banks charge for overdrafts and tackle high charging for unarranged overdrafts. These changes would make overdrafts simpler, fairer, and easier to manage.’
Is your overdraft at risk?
The problem these changes present, however, is many rely on their overdraft and will fear losing it.
If banks are forced to remove them, consumers may be left with no access to credit and may need to pay back the bank the overdraft they are currently used to rolling over each month.
The FCA have acknowledged this as an issue, and recognise the more they tighten the regulatory noose around lenders, the more likely it is that those who are poorest will struggle to access credit and risk becoming financially excluded.
The likelihood is, however, banks will need to act to stop people operating permanent overdrafts.
However, they will be expected to help and support their customers when they identify that they are experiencing financial difficulties.
They may be required to introduce a reducing overdraft and also stop all interest and charges, so those funds normally servicing the overdraft, can be used to reduce the balance owed.
However, there is no hiding from the fact, with so many consumers addicted to rolling over their overdrafts; any forced withdrawal will be painful and difficult.
Struggling with an Overdraft?
If you are struggling with your overdraft and roll it over every month, this can be an indication that you are having financial problems and in need of a financial health check to see if you have become over indebted.
Creditfix are the UK’s leading Personal Insolvency practice and offer a full range of solutions to their clients, including Individual Voluntary Arrangements in England, Wales, and Northern Ireland; and Protected Trust Deeds and Debt Payment Programmes under the Debt Arrangement Scheme in Scotland.
To speak with a Creditfix Adviser and obtain free, confidential advice, call 0808 2234 102..