A radical shake-up of overdrafts will protect customers from higher charges and fixed fees for borrowing, the Financial Conduct Authority has confirmed.
The regulator said it is introducing the reforms to “fix a dysfunctional overdraft market”.
The changes aim to help protect the millions of consumers who use overdrafts, particularly more vulnerable customers, the Press Association reports.
The FCA said the changes represent the biggest overhaul to the overdraft market for a generation.
The new rules will:
- Stop banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts;
- Ban fixed fees for borrowing through an overdraft – calling an end to fixed daily or monthly charges, and fees for having an overdraft facility;Requiring banks and building societies to price overdrafts by a simple annual interest rate;Requiring banks and building societies to advertise arranged overdraft prices with an APR (annual percentage rate) to help customers compare them against other products;Issuing new guidance to reiterate that fees for refused payment should reasonably correspond to the costs of refusing payments;
- And require banks and building societies to do more to identify customers who are showing signs of financial strain or are in financial difficulty, and develop and implement a strategy to reduce repeat overdraft use.
The new rules will be in force by April 6 2020, but some changes will come into place earlier, such as the guidance on refused payment fees, which will take effect immediately.
Gillian Guy, Chief Executive of Citizens Advice, said overdraft charges can have a “serious knock-on effects for people’s debt and mental health”.
She added: “These new rules should help thousands of people from getting trapped in a debt spiral.
“If, after these measures are introduced, people still pay over the odds, the FCA should review the need for an interest rate cap to ensure no one is paying back more than twice what they borrowed.”
The FCA said research with consumers showed that they also wanted to see the cost of borrowing set out in pounds and pence alongside an APR and interest rate.
It said trade association UK Finance has agreed to implement this alongside the FCA’s remedies.