Our work on overdrafts found that fees paid for unarranged overdrafts were regularly 10 times as high as fees for payday loans. Our view was that new rules were needed. These rules address both how much the most vulnerable were being charged for unarranged overdrafts, and the level of fees and charges that many arranged overdraft customers were paying on top of interest rates. Some firms were charging some of the most vulnerable customers an effective interest rate of more than 80% a year on their arranged overdraft.
Asking banks to explain their overdraft rate changes
The new overdraft rates came into force between November 2019 and April 2020, following the rules we published in June 2019. In January 2020, we wrote to firms to ask them to explain how they reached their new overdraft rates. We have analysed the strategic, competitive and financial drivers of banks’ overdraft pricing decisions based on their responses. Having reviewed the evidence we obtained we do not intend to open a formal investigation at this stage.
Assessing the evidence from banks
Our changes have forced firms to make their overdraft prices transparent and easy to compare to other products. This makes it easier for consumers to shop around to find the best deals. While many of the banks’ new rates were similar, we have seen a range of pricing structures – both risk-based pricing and flat rates – and price points. We have also seen some challenger firms already offering lower overdraft rates. Despite banks increasing headline interest rates, the cost of borrowing will go down or remain unchanged for most people.
In their response to our letter, most banks estimate that these pricing changes would reduce their total overdraft revenue by between a quarter and a third. In total, this amounts to over half a billion pounds across these banks.
It will take time to see the full impact of the new rules as banks respond competitively to one another. Overdraft charges are still higher than other mainstream borrowing products like credit cards and personal loans. But we expect these forms of credit to create more competitive pressure on overdraft charges as consumers respond to the pricing changes and greater transparency. Consumers using overdrafts should think about whether that is the right product for them, as other products may well be cheaper or more suitable.
Our next steps
We will be keeping a close watch on how prices develop, particularly during and after the coronavirus pandemic. We require firms to publish information on their overdraft pricing alongside the information they already publish about current account services. This information is due to be published in August for the first time and will cover the quarter from 1 April to 30 June 2020. We will also carry out a post-implementation evaluation of our overall package of overdraft remedies around 12 months after the full package of remedies is implemented. So our evaluation will start after April 2021.
We estimated in January that 7 out of 10 overdraft users would be better off, or see no change in cost, once our new rules came into force. In our letter, we also asked banks for details of how they would be complying with rules to provide support to those who will be worse off once the new rates are in place. This could include providing forbearance for customers in financial difficulty, offering a personal loan at a lower rate or reducing their overdraft limit in phases alongside other support, such as budgeting advice. We have asked senior executives at firms to take personal accountability for ensuring that consumers get the help they are entitled to.
Given the ongoing coronavirus situation, we introduced specific measures in April to help consumers financially affected by coronavirus. This includes firms making sure that all overdraft customers will be no worse off on price when compared to the prices they were charged before the new overdraft rules. Today we confirmed proposals to ensure this support is focused on those customers financially affected by coronavirus and ensure they can continue to ask for a reduced interest rate on any additional borrowing over £500.
We expect firms to continue with the programmes of support that they have put in place to manage the impact of their previously announced pricing changes. We will closely monitor how they implement this support.