Over the past few days there has been significant comment about many headline overdraft rates, and in particular that major banks have aligned overdraft rates around 40 per cent.
The FCA study into the overdraft market concluded that it was dysfunctional. In particular, consumers found it very difficult to understand what charges they were paying and charges for unarranged overdrafts were very high, regularly 10 times the cost of a payday loan. These charges fell heavily on consumers who are vulnerable.
Our reforms of the market have ended high unarranged charges, saving typical borrowers up to £55 per month on an unarranged overdraft of £100 over 7 days.
Confusing fees and charges have been banned, and the cost of overdrafts has been made more transparent. For many occasional borrowers the removal of fees means they will pay less even though their headline rate of borrowing may increase.
We have now seen the major banks and building societies release their new rates – with most setting very similar prices.
The FCA has been in regular contact with the major banks and has written today to ask them to provide evidence of how they have arrived at their pricing decisions.
We are also being clear that we expect firms to take positive steps to help customers who may be worse off or in financial difficulties as a result of these changes. We have asked to see their plans for how they are dealing with the most affected customers.
We expect banks to take steps to support them, for example firms could reduce or waive interest, offer a continuation of overdraft borrowing at current rate of interest, or agree a repayment programme – including a personal loan.
Customers who are worried about the impact of any changes should contact their provider.
Overdrafts are not designed to be used for large amounts for long periods of time. People who need to borrow for a longer time may find that other methods of credit are more suited to their needs and may be more cost effective.
We will be keeping a close eye on the market and we will act should we see continued harm.