FCA crackdown on UK overdraft fees

Financial Conduct Authority plan overhaul of UK overdraft fees, claim current system is ‘dysfunctional’, caused ‘significant consumer harm.’

Arutz Sheva Staff,

Overdraft fees
Overdraft fees

The Financial Conduct Authority has stated its plans for a complete overhaul to the UK’s overdraft fees, chief executive for the country’s financial watchdog claiming the current system that both banks and building societies have in place for their overdrafts is ‘dysfunctional’, and has caused ‘significant consumer harm.’ As a result of this, the FCA have decided to take ‘decisive action’, by completely revolutionising the way in which overdrafts are managed.

Reactions to these dysfunctional methods have been the result of investigations into the way overdrafts are managed throughout the country. These results have shown that a shocking 50% of overdraft charges have come from just over 1% of consumers, and that those living in the most deprived areas of the country (and are therefore most vulnerable) where amongst the most likely to build up such charges.

The reforms are set to take effect in early April next year (2020), however the FCA is pushing for banks and building societies to make these regulatory changes as early as possible. The trade association organisation UK Finance has commented on the FCA’s recent push for reform, claiming that ‘Overdrafts can provide a convenient way for customers to smooth their short-term cash-flow, and there is a highly competitive market in the UK. The banking industry is committed to heling customers manage their money and we will be working closely with the FCA to implement these rules.’

33 million people across the UK have an overdraft, 19 million of these accounts being planned (or arranged) overdrafts, with the remaining 14 million consumers using unplanned (or unarranged) overdrafts. Whether planned or unplanned, most overdrafts will come with a routine fees, unless in such circumstances as a student account.

Unplanned overdraft fees are likely to be higher than planned, however the charges will depend entirely upon the account. In 2017, organisations offering overdrafts made an astounding £2.4 billion from these accounts, 70% of this revenue coming from planned overdrafts, and 30% coming from unplanned.

The new regulations said to be implemented by spring next year will require banks and building societies to stop all daily and monthly overdraft fees, restricting these organisations to charging a simple, easy to follow annual interest rate. In addition to this, regulations surrounding the advertisement for overdraft plans will also be changing; the FCA enforcing stricter guidelines as to how such organisations offer their overdraft plans. Advertisements for overdrafts will now have to clearly display any and all charges that account holders may accrue.

Providers will also have to be more aware as to when a customer is in financial struggle, and attempt to resolve this situation effectively rather than ignoring the situation entirely. It has been estimated by the FCA that the average fee for a £100 overdraft usage will decrease from £5 to 20p. These new regulations are said to be one of the biggest overhaul in overdraft regulations the country has seen, and will hopefully help to reduce the damaging effects overdraft fees can have on UK consumer’s finances.

The FCA is also said to be reviewing the guarantor loans industry which is worth over £1bn in the UK and has generated over 3,000 complaints in the last year.