This morning the Financial Conduct Authority (FCA) has made the bold decision to stop banks and building societies from charging customers more when they borrow using an unarranged overdraft compared to arranged overdraft. Fixed fees will be banned under the new reforms, and instead, providers will be required to price overdrafts using a simple annual interest rate.
Banks and building societies will also need to display arranged overdrafts with an annual percentage rate (APR) to help consumers compare deals more clearly. Firms will also be expected to work harder to support consumers with financial strain and work out a strategy to reduce repeat overdraft use.
Rachel Springall, Finance Expert at Moneyfacts.co.uk, said:
“These new reforms will be a huge shake-up to the banking sector, it’s just a shame it couldn’t come sooner. Over recent years, many current account providers introduced fixed fees to their tariff, so this is going to take some time to unravel. These firms have until 6 April 2020 before the fixed fee ban comes into force, but many other the other rules, such as ways to remedies frequent overdraft users, will come into effect on the 18 December 2019.
“Consumers would be wise to keep a close eye on their current account tariff and any perks it may offer, because banks and building societies will likely need to recoup their losses caused by the fixed fee ban. As a result of these changes, the cost of borrowing £100 on an unarranged overdraft could fall from £5 per day to less than 20p a day, according to the FCA.
“Our own data shows that arranged overdraft fees have risen over the past decade while the average unarranged overdraft fee has fallen slightly, although it still stands significantly higher. The average arranged overdraft usage fee stands at £7.68, more than double what it was in 2009 when it stood at £3.12. Meanwhile, the average unarranged overdraft usage fee stands at £36.89 today down from £47.85 10 years ago. The volume of accounts that now charge an arranged or unarranged overdraft usage fee is 65%.
“Over the next few weeks we would expect a few big names to respond to these measures, and when they do, it is highly likely others will follow suit. Banking customers will benefit from a ban on fees, but it’s unknown at this stage whether banks will amend other features of an account to make up for the loss in overdraft charges, and that could mean bad news for consumers overall.”