Overdrafts and coronavirus: draft guidance for firms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 be salary, wages 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 coronavirus 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 Covid-19.

This guidance sets out our expectation that firms provide, for a temporary period only, exceptional and immediate support to consumers facing short-term 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).

Where a customer was in arrears for other reasons, 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.

The 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 welcome the steps that a number of firms have taken to introduce fee and interest free buffers for all arranged overdraft customers.

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 Covid-19. The second applies to overdraft customers more broadly.

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 for a period of no less than three months, when requested. If the arranged overdraft limit is lower than £500, no interest should accrue on the overdraft balance up to that limit for three months. 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 below £500, the entire balance should be fee-free for three months.

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 consumer’s financial position will improve in the future and can take account of historic information.

Where an impacted customer holds an arranged overdraft facility that presently exceeds £500 (or which the lender is willing to increase beyond £500) the interest free amount may be restricted to £500. Firms may offer interest free overdrafts of more than £500 (again new or increased overdraft facilities, will be subject to the normal creditworthiness assessment, as set out above).

 

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 coronavirus.

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, even if it is not asked for.

Measure 2 – Overdraft interest rate pricing

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 consistent with the obligation to treat customers fairly in the light of the exceptional circumstances arising out of Covid-19.

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 three-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.

Firms should ensure that there is no negative impact on the customer’s credit file because they have taken advantage of interest free borrowing for a temporary period. The interest free borrowing described here should be regarded as being offered in exceptional circumstances outside of the customer’s control. In accordance with the relevant Steering Committee on Reciprocity (SCOR) Guidance, the account of the customer should not be recorded as having any form of detrimental arrears.

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

We want to act quickly to protect consumers in these difficult times. We consider that the delay involved in publishing a formal consultation accompanied by a cost benefit analysis would be prejudicial to the interests of consumers. We are therefore not doing so. There is no statutory requirement to prepare a cost benefit analysis in relation to guidance.

This consultation has now closed. We will publish feedback on responses and issue a Policy Statement once we have reviewed your comments.

Timing

If confirmed, the measures would start to come into force by Thursday 9 April 2020.

The FCA’s objectives and regulatory principles

The proposals in this consultation 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 they will adversely affect consumers with protected characteristics.