FCA to crack down on bank overdraft charges

The Financial Conduct Authority has fired a warning shot over the way banks charge for overdrafts, announcing measures intended to save consumers up to £140m a year and calling for fundamental reform of the sector.

Following an 18-month review of high-cost consumer credit, the FCA is proposing introducing mobile alerts to warn of potential overdraft charges, stopping the inclusion of overdrafts in the term “available funds” and making it clearer that overdrafts are credit, among other measures.

The City watchdog is also considering more “radical” options such as banning fixed fees and ending the distinction around unarranged overdraft prices.

In 2016, banks made £2.3bn in revenue from the service, a third of which came from unarranged overdrafts.

Andrew Bailey, chief executive of the FCA, said: “Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping into an overdraft in the first place. However, we believe more fundamental change is needed in the way banks charge customers for overdrafts.”

The report also highlighted the rent-to-own sector, where consumers can pay massively inflated prices because of the high levels of interest. It cited one example where people have paid over £1,500 for a cooker that could be bought for less than £300.

It said it was considering a cap on prices, with the change introduced – if found to be appropriate – by April 2019.

Other issues raised includes improving standards in the sales practices used in home-collected credit, such as preventing firms from offering new loans or refinancing during home visits. The FCA said changes such as these could save consumers up to £34m a year, while £27.5m could be saved by requiring catalogue credit and store card firms to do more to help customers avoid persistent debt.

The FCA announced it would review bank overdrafts, doorstep loans, catalogue credit and rent-to-own borrowing on the back of growing concerns that the high-cost credit sector was exploiting some of the most vulnerable and poorest members of society as well as forcing up consumer debt.

Bailey said: “High-cost credit is used by over three million consumers in the UK, some of who are the most vulnerable in society. We have proposed a significant package of reforms to ensure they are better protected.

“The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer.”

As required by law, the City watchdog will now formally consult on all the new rules it is proposing to introduce.