UK Regulator Cracks Down On Overdraft Abuses

Tom Burroughes

19 December 2018

The UK financial regulator is proposing to stop how people on low incomes are hit by banks for unauthorised overdrafts, saying that lenders made £2.4 billion in overdrafts last year.

The Financial Conduct Authority said more than 50 per cent of banks’ unarranged overdraft fees were paid by only 1.5 per cent of customers in 2016, and that people living in deprived areas were most likely to pay such fees.

The practice should be stopped, the watchdog said.

The FCA proposed that the price for each overdraft will be a simple, single interest rate - no fixed daily or monthly charges. Fixed fees for borrowing through an overdraft will be banned.

Arranged overdraft prices must be advertised in a standard way, including an APR to help customers compare them with other products, the FCA said.

“It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform. We are proposing a series of radical changes to simplify the way banks charge for overdrafts and tackle high charging for unarranged overdrafts,” Andrew Bailey, chief executive of the FCA, said.

Laura Suter, personal finance analyst at investment platform AJ Bell, applauded the change.

“Rather than having an array of charges, which can be per transaction, week or month of being overdrawn and a percentage of the amount borrowed, borrowers will have an easier-to-understand interest rate to help them know how much borrowing will actually cost,” she said. “Unarranged overdrafts are often too easy for people to fall into, with around 19 million people using them each year, and they can then face charges more than 10 times higher than payday loans.”

“Brits have around £6.5 billion outstanding in overdraft borrowing but this has fallen dramatically over the past decade, as people increasingly shift their debt to credit cards. So while these proposals will help those in persistent overdraft debt, it is by no means a silver bullet to stop the UK’s costly debt problems,” Suter added.