FCA confirms biggest shake-up to the overdraft market for a generation

The Financial Conduct Authority (FCA) has today confirmed it is introducing reforms to fix a dysfunctional overdraft market. These changes will make overdrafts simpler, fairer, and easier to manage and will protect the millions of consumers that use overdrafts, particularly more vulnerable consumers. The changes represent the biggest overhaul to the overdraft market for a generation.

In 2017, firms made over £2.4bn from overdrafts alone, with around 30% from unarranged overdrafts. More than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016.  People living in deprived areas are more likely to be impacted by these fees. In some cases, unarranged overdraft fees can be more than ten times as high as fees for payday loans.

Today the FCA has announced that it is:

  • Stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts.
  • Banning fixed fees for borrowing through an overdraft – calling an end to fixed daily or monthly charges, and fees for having an overdraft facility.
  • Requiring banks and building societies to price overdrafts by a simple annual interest rate.
  • Requiring banks and building societies to advertise arranged overdraft prices with an APR to help customers compare them against other products.
  • Issuing new guidance to reiterate that refused payment fees should reasonably correspond to the costs of refusing payments.
  • Requiring banks and building societies to do more to identify customers who are showing signs of financial strain or are in financial difficulty, and develop and implement a strategy to reduce repeat overdraft use.

Extensive FCA research with consumers showed that they also wanted to see the cost of borrowing set out in pounds and pence alongside an APR and interest rate; UK Finance have agreed to implement this alongside the FCA’s remedies.

Andrew Bailey, Chief Executive of the Financial Conduct Authority said:

'The overdraft market is dysfunctional, causing significant consumer harm. Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, which are often ten times as high as fees for payday loans. Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges, that are both a result of and driver of poor competition.

'Our radical package of remedies will make overdrafts fairer, simpler and easier to manage. We are simplifying and standardising the way banks charge for overdrafts. Following our changes we expect the typical cost of borrowing £100 through an unarranged overdraft to drop from £5 a day to less than 20 pence a day.

'The decisive action we are taking today will give greater protections to millions of people who use an overdraft, particularly the most vulnerable.'

The new rules will be in force by 6 April 2020, apart from the guidance on refused payment fees, which will take effect immediately, and the repeat use remedies which will come into force on 18 December 2019. The repeat use remedies will take effect alongside the changes we announced in December 2018 to make overdrafts easier to manage:

  • Digital eligibility tools that allow customers to check if they can get a cheaper overdraft with another provider.
  • Overdraft charge calculators that help customers translate interest rates into pounds and pence.
  • Text message or push notification alerts and changes to display overdrawn balances at cash machines to address unexpected overdraft use.

Notes to editors

  1. PS19/16: High-Cost Credit Review: Overdraft policy statement
  2. CP19/18: Overdraft Pricing and Competition Remedies
  3. FCA overdraft proposals consumer research summary report - Atticus
  4. Video: consumers' views on overdrafts
  5. Overdrafts infographic
  6. Additional information on the scope of application of our rules – private banks and currency accounts are exempt from our rules.
  7. Additional information on fixed fees for overdraft use – the ban covers all fees for making use of, opening or maintaining an overdraft.  Fees for refusing a payment due to lack of funds (‘refused payment fees’) are not included in this:  firms are entitled to charge these under the Payment Services Regulations 2017).
  8. Additional information on facility fees – the ban on these fees will apply to overdraft facilities of up to and including £10,000.
  9. Additional information on overdrafts:
    Numbers of consumers affected:

    Revenue generated

    • 52 million people have a current account.
    • 19m* use arranged overdraft
    • 14m* use unarranged overdrafts
    • 7m* use both
    • 26m* overdraft users
      *numbers are rounded
      Revenue generated
    • £2.4 billion made in revenue from overdrafts in 2017 – around 30% (ie £0.7bn) came from unarranged overdraft fees and charges
  10. CP18/42:High-Cost Credit Review: Overdrafts consultation paper and policy statement
  11. CP18/43: High-Cost Credit Review: Feedback on CP18/12 with final rules and guidance and consultation on Buy Now Pay Later offers
  12. Strategic Review of retail banking business models - Final report
  13. Find out more information about the FCA.