According to the Financial Conduct Authority, FCA, banks will no longer be able to charge fixed daily or monthly fees for overdrafts. As well as this, the fees for unplanned overdrafts will be the same as for arranged ones.
Unauthorised or unplanned overdrafts allow people to dip into extra credit through their current accounts or credit cards, usually as a safety or emergency measure. However, the costs are exorbitant, with some banks charging £80 to £100 for every extra £100 borrowed – making it the most expensive form of borrowing in the UK and almost 4 times the cost of using payday loans.
The FCA has stated that these new rules will come into play in April 2020, and will be the “biggest overhaul for a generation.”
Banks will now also be forced to charge an annual rate of interest on every overdraft, which needs to be advertised clearly to help consumers compare products.
Banks made over £2.4 billion from overdrafts in 2017, with around 30% of that coming from unplanned overdraft.
The FCA has claimed that the changes will make overdrafts “simpler, fairer and easier to manage.”
What are the changes to the banks?
When the new rules come into force, banks will still be able to refuse to make a payment if a customer doesn’t have the funds to repay it, but any resulting fee for them must reflect the cost to the bank.
Banks will also have to carry out more research to identify and aid customers who might be showing symbols of financial difficulties or strains.
According to the FCA, the new rules will mean that the typical cost of borrowing £100 through an unarranged overdraft will drop from £5 a day to less than 20p. However, there has been some concern that those who previously used arranged overdrafts may face higher charges.
Gillian Guy, who is the Chief Executive of the Charity Citizens Advice, has said that overdrafts were one of the biggest areas of concern for the charity as large numbers of consumers would contact them about these.
Guy stated “Overdraft charges are able to have serious knock-on effects for people’s debt and mental health. These new rules should help thousands of people from getting trapped in a debt spiral”
She also claimed that if, after the new rules are introduced, people are still having to pay well over the odds, FCA should introduce an interest rate cap. This would be to ensure that no one has to pay back more than double the amount that they borrowed.