UK ban on excessive bank overdraft fees

Banks in the UK face a ban on excessive account overdraft fees under new proposals from the Financial Conduct Authority (FCA).

The ban will also extend to daily and monthly fixed fees, as well as regular fixed fees that apply when a customer enters their overdraft. As such, banks will have to advertise one clear rate for their overdraft services.

This move means that not only will customers not have to worry about being ripped off for going into their overdraft, but it also means that they can more easily compare services offered by different banks.

Expensive Business

Some estimates suggest that high street banks and other lenders made as much as £2.4 billion from overdrafts in 2017. Of that figure, 30% was from unarranged borrowing, making it expensive business for customers.

With the new FCA proposals, banks can no longer charge separate rates for arranged and unarranged borrowing. This will help the 14 million people each year who end up paying for overdrafts.

One further element of the FCA advice was that banks should charge fees on refused payments that are in line with the original fee, and that banks should explain these costs clearly.

Perhaps the most troubling figure is that half of the money paid in unarranged overdrafts in 2016 came from just 1.5% of customers, with a disproportionate amount of those people living in deprived areas.

Similar to Payday Lending

By some estimates, overdraft fees can end up costing ten times more than payday loans, another area that has faced reforms from the FCA. With some banks, it could cost up to £76.35 over the course of seven days to borrow over £100. With others, it could cost £100 per month for using an unarranged overdraft.

Under the new proposals, the FCA hopes that: “These changes would provide greater protection for the millions of people who use an overdraft, particularly the most vulnerable. It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform … These changes would make overdrafts simpler, fairer, and easier to manage.”

Clearer Advertising

Banks will have to follow a standard way of advertising their overdraft costs. This will allow customers to make more informed choices, as the information will be clearer. Under the rules, banks must show APR (annual percentage rates) next to overdraft products.

One final piece of advice from the FCA suggests that banks must do more to help customers. This means identifying those who are in financial difficulties and helping them reduce their overdraft usage. However, they did not give any clear details on how this should be done.

It remains to be seen how the banks will react to this news. The FCA has a consultation on the subject until March 2019 to see which measures will be introduced.