The Financial Conduct Authority (FCA) will ban fixed daily and monthly overdraft fees from next April, replacing it with a single interest rate. This means an unarranged overdraft will no longer cost more than an arranged overdraft under the new rules. Banks are also no longer able to charge you fees just for having an overdraft facility.
Authorities have estimated borrowing £100 via an unarranged overdraft will be reduced from a typical cost of £5 per day, to less than 20p per day with the new scheme.
Andrew Bailey, Chief Executive of the FCA said that the overdraft market is currently “dysfunctional, causing significant consumer harm”.
He added especially vulnerable customers are “disproportionately hit by excessive charges for unarranged overdrafts” and these are often “ten times as high as fees for payday loans”.
Mr Bailey said: “Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges, that are both a result of and driver of poor competition.”
Can you claim your overdraft charges back?
Under the new rules, customers will not have to pay fixed fees but will still have to pay an annual interest rate on the amount that they may borrow.
However, the changes to overdrafts will not come into effect until April 2020, so the old rules will apply until then.
The FCA said this will make overdrafts “simple, fairer, and easier to manage”.
The financial regulator added it would “protect the millions of consumers that use overdrafts, particularly more vulnerable consumers”.
This is because the price of each overdraft will be a single interest rate, rather than fixed fees of a certain amount per day or month.
FCA also urged banks to do more to identify customers in financial difficulty and help them reduce overdraft use, starting from this December.
Following the announcement from the FCA Michael McKee, a Financial Services Partner, at global law firm DLA Piper said: “The regulator needs to decide what its objectives for consumers are: either to encourage them to be more hands-on or be the backstop.
“While the policy rationale for this change is based upon economic and competition philosophies, and pressure from consumers to limit the penalties of unplanned overdrafts, it disincentivises sensible money management by bank customers.
“Therefore, we could see more customers entering into more short-term debt – which is not what the FCA intends.”
Banning overdraft charges were first proposed at the end of 2018, after the financial regulator found firms made approximately £2.4 billion from the fees the prior year.
The FCA also found those living in deprived areas were more likely to use unarranged overdrafts and pay higher charges than others.