FCA to ban excessive overdraft fees in 'once-in-a-generation' shake up

The Financial Conduct Authority is cracking down on the UK’s “dysfunctional” £2.4bn overdraft market, including banning banks from charging higher fees for unauthorised borrowing.

The financial watchdog said that in 2017, banks made £2.4bn from overdrafts, with around 30% coming from unarranged overdrafts; in 2016, more than 50% of unarranged overdraft fees came from just 1.5% of customers.

It called it a “dysfunctional market”, with people living in deprived areas more likely to be impacted by higher fees. Some unarranged overdraft fees were more than ten times as high as fees for expensive payday loans, the watchdog found.

The FCA is proposing replacing fixed daily or monthly charges with a more simple, single-interest rate; banning fixed fees for borrowing through an overdraft; and stopping firms from charging higher prices when customers use an unarranged overdraft.

Other proposals include insisting that overdraft prices are advertised more clearly, allowing customers to better compare products, and ensuring banks better identify customers who are starting to struggle financially to help them reduce their overdraft use.

Andrew Bailey, FCA chief executive, said the changes would be the “biggest intervention in the overdraft market for a generation”.

He continued: “It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform. We are proposing a series of radical changes to simplify the way banks charge for overdrafts and tackle higher charging for unarranged overdrafts. These changes would make overdrafts simpler, fairer and easier to manage.”

Laura Suter, personal finance analyst at AJ Bell, welcomed the FCA’s proposed changes, which she said would force banks to stop charging customers “rip-off fees”.

She added: “Unarranged overdrafts are often too easy for people to fall into, with around 19m people using them each year. Someone with a £100 unarranged overdraft can pay £5 a day in charges, and the FCA plans to reduce this to just 20p a day.”

Stuart Duncan, analyst at Peel Hunt, said the proposals had “the potential to have a significant impact”.

Eric Leenders, managing director of personal finance at UK Finance, the banking industry's trade body, said: “Helping customers to manage their everyday finances is a priority for the banking industry and we acknowledge the FCA’s intention to make overdraft pricing simpler and easier to understand.

“It is important, however, that individuals are still able to use unarranged overdrafts where appropriate.”

“We will consider [the] proposals carefully and continue to liaise with the FCA in the coming months.”

The consultation period on the FCA’s proposed changes to the overdraft market closes in March.