Overdrafts and coronavirus: temporary guidance for firms

This guidance applies to:

  • A firm with permission to accept deposits and which provides a current account with an overdraft facility.
  • Primary personal current accounts. A primary account is the account into which a customer would usually receive, or would have received, their main source of income. Main source of income would normally include salary, wages (whether employed or self-employed) or pension payments.
  • This guidance applies to EEA firms who currently passport into the UK.
  • This guidance does not apply to private banks and credit unions.

This guidance applies in the exceptional circumstances arising out of the coronavirus pandemic (Covid-19) and its impact on the financial situation of overdraft customers. It is not intended to have any relevance in circumstances other than those related to coronavirus.

This guidance sets out our expectation that firms provide, for a temporary period only, exceptional and immediate support to consumers facing temporary difficulties with their finances, or who can reasonably expect to face temporary difficulties with their finances, due to circumstances arising out of coronavirus. It is intended to provide relief to those who might be having difficulties due to a loss of or reduction in their income (or income of other members of their household) or to those who expect to experience such difficulties.

Where a customer was in arrears in circumstances other than those related to coronavirus our existing forbearance rules and guidance in CONC would continue to apply in the first instance. These would include for example the firm considering suspending, reducing, waiving or cancelling any further interest or charges.

We recognise that, for many customers, current account overdraft facilities are likely to be the easiest and quickest way to access emergency funds to cover a temporary shortfall in income and to meet essential expenditures. However, we also recognise that overdraft facilities are not an appropriate means to manage long-term financial difficulty and wish to guard against future over-indebtedness.

We will review this guidance in the next 3 months in the light of developments regarding coronavirus and may revise the guidance if appropriate.

This guidance builds on Principle 6 ('A firm must pay due regard to the interests of its customers and treat them fairly'). It sets out the FCA’s expectations for firms to provide coronavirus related support for customers who are experiencing or reasonably expect difficulties with their finances at the current time. When implementing this guidance, firms should take account of the particular needs of their vulnerable customers.

This guidance is potentially relevant to enforcement cases and the FCA may take it into account when considering whether it could reasonably have been understood or predicted at the time that the conduct in question fell below the standards required by Principle 6.

We are setting out two measures. The first is intended to assist customers who are experiencing or who can reasonably expect to experience temporary difficulties with their finances as a result of coronavirus. The second applies to overdraft customers more broadly. This guidance comes into force on 14 April.

This guidance does not apply to Basic Bank Accounts.

If you have any questions or concerns about this guidance, contact us.

Measure 1 - Interest free overdrafts for those in difficulty

Where a firm provides an arranged overdraft to a customer, and the customer has difficulties with their finances, or reasonably expects to have difficulties with their finances, due to the impacts of coronavirus, the firm should, at the customer’s request, assist the customer in the following way:

  • No interest should be payable in respect of up to £500 of the balance of the arranged overdraft.
  • Where an arranged overdraft has a limit of over £500, firms should not charge interest on the first £500 irrespective of whether the balance exceeds that amount.
  • In the case of an arranged overdraft with a limit of £500 or below, the entire balance should be interest-free. 

There should be a period of 3 months, beginning with the date on which this guidance comes into force, at any point during which eligible customers can request this assistance. The assistance should last 3 months from the time the customer requests it. This means that the assistance could continue beyond the point where the 3 months window for requesting this assistance expires.

Where a firm instead chooses to extend an interest free amount to all customers with an arranged overdraft on their primary current account without the need for a request, this may be for a fixed period in the calendar that is the same for all customers. To be consistent with this guidance:

  • The interest free amount extended must be at least that required to be provided under this guidance.
  • The measures must be of at least 3 months duration, starting no later than 14 April.

Customers may apply for new or increased overdraft facilities in the normal manner. The provision of new or increased arranged overdraft facilities is subject to the standard creditworthiness assessment by lenders. In carrying out this assessment lenders should take into account individual circumstances especially during this exceptional period. Creditworthiness assessments can look beyond current stressed circumstances if it is reasonable to expect the customer’s financial position will improve in the future and can take account of historic information. New customers, and existing customers who are offered a new or increased overdraft, should be eligible for the same assistance as existing customers of the firm.

Summary:

Arranged overdraft limit Interest rate
Up to and including £500 Interest free
Above £500 First £500 will be interest free. Standard pricing rate for borrowing above £500 (see Measure 2)
Arranged increases to limits below £500 Interest free
New overdrafts First £500 will be interest free. Standard pricing rate for borrowing above £500 (see Measure 2)

Firms should make clear in their communications including on their websites that they offer interest free overdrafts as set out above to those arranged overdraft customers experiencing difficulties with their finances, or who reasonably expect to encounter difficulties with their finances, due to the impact of Covid-19.

If, during an interaction between the firm and an arranged overdraft customer about overdraft borrowing, the customer provides information suggesting that the customer may be in this position, the firm should ask whether the customer would be interested in an interest free overdraft.

We would expect that customers’ access to, and use of, an interest-free overdraft facility will be reported on their credit file in the usual way.

Measure 2 – Overdraft interest rate pricing

This measure comes into force on 14 April, for at least a 3 month period.

Our current rules require that where a firm makes a change or has made a change to its charging structure in response to the rules set out in PS19/16, it must ensure it considers the impact of that change on existing customers including those with large arranged overdraft balances and where appropriate treat these customers with forbearance and due consideration.  

Some firms have recently increased their overdraft prices. Firms must review their prices to ensure they are set at a level that is consistent with the obligation to treat customers fairly in the light of the exceptional circumstances arising out of coronavirus.

In particular we expect firms to ensure that customers are not worse off when compared to prices charged prior to the publication of PS19/16. For all firms, they will need to demonstrate to the FCA that the rates they charge are consistent with this guidance.

Firms have flexibility in the way they achieve this, it could include or be a combination of the following:

  • Not introducing any increase in price.
  • Reducing its published interest rates.
  • By manual adjustments.

At the end of the 3 month period, providers should consider whether customers who have benefitted from these guidelines are in financial difficulty. If they are, then the lender should provide forbearance under normal policies and processes.

Overdraft repeat use rules

Our repeat use rules apply to any customers who are showing signs of financial strain or are in financial difficulty. The rules require firms to take steps to identify these customers and then help them to reduce their overdraft use.

Firms have been required to develop their own strategies for addressing harm from repeat use. These strategies can be amended, and in the present exceptional circumstances it may be appropriate for firms to do so. In particular firms may wish to reassess how they phase implementation of the strategy and delay the timing of contact with customers where they consider this appropriate.

Process and next steps

The measures in this guidance should be brought into effect no later than 14 April. Firms are free, however, to implement these measures sooner, at any time from 9 April, if they wish and we would welcome firms doing so.  

If you have any questions or concerns about this guidance, contact us.

The FCA’s objectives and regulatory principles

The proposals in this guidance support our consumer protection objective and are designed to protect consumers by providing them with temporary support in the light of the current exceptional circumstances arising out of coronavirus (Covid-19).

Equality and diversity

We are required under the Equality Act 2010 to ‘have due regard’ to the need to eliminate discrimination, harassment, victimisation and any other conduct prohibited by or under the Act, advance equality of opportunity between persons who share a relevant protected characteristic and those who do not, and to foster good relations between people who share a protected characteristic and those who do not.

As part of this, we ensure the equality and diversity implications of any new policy proposals are considered. We do not consider this guidance will adversely affect consumers with protected characteristics.