FCA research shows many consumers paying too much for overdrafts

The Financial Conduct Authority (FCA) has published research into the £8bn overdraft market a week after it took over responsibility for 50,000 consumer credit firms.

The findings show overdrafts still aren’t providing good value, with many consumers confused about the costs.

Christopher Woolard, director of policy, risk and research, at the FCA, says:

"Just about everybody who banks can have access to some sort of overdraft facility – whether they’ve signed up for it or not. The sheer size of this market is huge and with overdrafts bolted on to over 30 million UK current accounts, we want to make sure it is working well for consumers."

The FCA looked at both arranged overdrafts, those that come as part of a current account package, and unarranged overdrafts, where firms allow customers to go beyond their overdraft limit.

The FCA’s research shows that using an arranged overdraft can quickly become habit, with many consumers giving little thought to the actual cost of interest or fees.  

As consumers tend not to consider overdrafts when deciding on a current account and don’t switch on the basis of overdrafts, there is little pressure on banks to provide good value overdrafts.

Recent measures agreed between industry, the Office of Fair Trading (OFT) and Government, such as text alerts for unarranged overdrafts, have helped to improve things, but unarranged overdrafts still carry high charges and the terms set by banks can be so complex and opaque that even the most astute consumer could struggle to understand what they are paying for.

Research shows:

  • many people don’t realise how much overdrafts can cost and are confused by unarranged overdrafts
  • consumers often don’t see arranged overdrafts as borrowing and quickly become accustomed to using them, sometimes viewing them as an extension of their income. The presentation of this as ‘available funds’ reinforces this
  • repayments are often driven by income coming in rather than as scheduled payments to clear an outstanding balance
  • there may be incentives for firms to raise revenue by increasing overdraft limits, these extensions are often perceived by customers as their bank ‘trusting’ them.

A number of banks have claimed that overdrafts subsidise ‘free’ current accounts, but we think the situation is more complicated than this.  There is evidence that personal current accounts help banks to sell a range of more profitable products.  One aspect of this is cash savings, which the FCA is currently exploring through a market study.

The FCA will now be investigating how providers set and monitor overdraft limits and their governance and strategies for doing so. As part of these next steps, the FCA will also consider making some voluntary measures mandatory in autumn 2014.

The FCA will also work alongside the Competition and Markets Authority to make sure any actions complement (and do not duplicate) its current work updating the OFT’s 2013 review of the current account market.

The research is part of the FCA’s new approach to consumer credit and its remit to closely monitor how firms treat their customers.

Notes for editors

  1. To view a copy of the FCA’s consumer credit insight report on overdrafts see https://www.fca.org.uk/firms/consumer-credit-research-overdrafts
  2. To view a copy of the qualitative research report on overdrafts see http://www.fca.org.uk/news/consumer-credit-research
  3. Further overdraft statistics show: • 34% of personal current account revenue came from overdrafts in 2011 • Unarranged overdraft charges revenue was £1.7bn in 2011 • There are 61 million personal current accounts in the UK, over 30 million of these have an overdraft facility • £8bn in overdrafts was owed to banks and building societies as of July 2013, we estimate that 90% of these were arranged overdrafts
  4. For further information about the competition review into credit cards see www.fca.org.uk/news/credit-cards-competition-review
  5. In March the FCA announced a thematic review into payday lenders www.fca.org.uk/news/press-releases/consumer-credit-countdown-–-review-debt-collection-practices-payday-lenders
  6. The Cash Savings Market Study was announced in September 2013, for further information see www.fca.org.uk/publications/market-studies/cash-savings-market-study​​​​​​​
  7. On 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
  8. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
  9. Find out more information about the FCA.