Overdraft fee hikes won't be formally investigated

2 July 2020   By Dr Lucy Brown, Editor

Financial Conduct Authority (FCA) has decided the overdraft rate increases announced by banks don't require a formal investigation.

The FCA requested information from banks about their new interest rates following many providers setting them at similar levels.

However, they have concluded there are different pricing structures on offer and that most customers will see no change or be better off.

The regulator will keep a close eye on the overdraft market a review will be conducted after April 2021 to see how the new overdraft system is working.

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Credit: Piotr Swat/Shutterstock.com

No investigation

The FCA wrote to overdraft providers in January asking them to justify the interest rates they had set ahead of overdraft reforms coming into force.

Now the FCA has examined the responses from banks and concluded there is no need for a formal investigation at this stage.

They are satisfied that, while many headline rates are the same, different providers are offering different pricing structures and challenger firms are offering lower rates and therefore promoting customer choice.

In their responses, banks emphasised their overall revenue from overdrafts would be reduced by up to a third, and the FCA's own research suggests that seven out of ten borrowers would see no change or be better off under the new overdraft rates.

Banks will be forced to publish information about their overdraft pricing for the first time in August, covering the quarter between 1 April and 30 June 2020.

Plus, the FCA will evaluate the reforms a year after they have come into force, so they expect their review to begin after April 2021.

What are the reforms?

Overdraft pricing reform officially came into force in April, although several banks paused implementation due to the coronavirus crisis.

The reforms were designed by the FCA to ensure unarranged overdraft customers don't pay more than those with arranged overdrafts and that overdrafts are advertised with a simple annual interest rate to ensure customers can compare overdrafts from different providers.

When rates were announced, however, many providers set them at similar levels around the 39% mark, with some customers with poorer credit histories set to pay 49.9% EAR.

As the FCA has pointed out, some challengers like Monzo and Starling have set more competitive rates based on credit histories and starting at 19% and 15% respectively.

They have used this as evidence that customers can shop around for better deals on their overdrafts, yet many customers already in their overdrafts may struggle to see the benefit of this.

We've got advice on budgeting to get debt free in this guide.

Coronavirus impact

As we mentioned above, the coronavirus outbreak has affected the implementation of new overdraft rates, but financial providers are gradually getting back to normal.

From 14 July, many banks will start charging the new overdraft rates, meaning customers already deep into their overdrafts could see their interest payments increase.

However, the FCA has confirmed customers are still able to ask their bank for £500 of their overdraft to be made interest-free for three months, with an extended deadline of 31 October for customers to make this application.

Banks are also required to provide further support to customers in the form of lower interest rates on the balance above the £500 buffer.

The key element of both the interest-free buffer and the extra support is that customers have to request it directly from their bank - it isn't applied automatically.

For those customers struggling to repay loans and credit card bills, the window to request a payment freeze was extended to 31 October 2020 after proposals brought forward by the FCA last week were accepted by the industry.

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