Which way will the FCA jump on overdraft charges?

At the New City Agenda event on the future of high-cost credit, Andrew Bailey, CEO of the FCA said that the regulator would soon be making an announcement about overdrafts and other sectors of the high-cost credit market. Consumers have already paid over £10 billion in unarranged overdraft charges since the OFT lost a case at the Supreme Court in 2009. At the event there were questions about whether the FCA would continue the previous approach of relying on giving consumers information and hoping new technology will improve matters or take strong action to cap these charges?

7th June 2019

To address the harm from overdrafts the FCA will implement a package which will require banks to charge the same for arranged overdrafts and unarranged overdrafts. This should bring down the cost of unarranged overdrafts and hopefully signals a move away from relying on disclosure of information to reduce consumer detriment. Banks which had previously described the cost of their overdrafts as 1p per £6 borrowed will have to admit that it is actually around 60% APR. Consumer groups have supported the proposals but some have expressed concern about banks using risk-based pricing to push up charges for vulnerable consumers. There are also questions about whether consumers will get redress if they have been subject to excessive charges for refused payments.

The FCA’s package of reforms includes:

  • stopping firms from charging higher prices when customers use an unarranged overdraft
  • banning fixed fees for borrowing through an overdraft, – no daily or monthly fees, or fees for having an overdraft facility
  • issuing new guidance to reiterate that refused payments fees should reasonably correspond to the costs of refusing payments
  • simplifying overdraft pricing – ensuring the price for each overdraft will be a simple, single interest rate – no fixed daily or monthly charges
  • standardising how arranged overdraft prices are presented in advertising, including an Annual Percentage Rate (APR) to help consumers compare overdrafts against other products
  • requiring firms to do more to identify overdraft customers who are showing signs of financial strain or are in financial difficulty, and to help them to reduce their overdraft use

The History

Challenge those bank charges

Bank charges began to be recognised as a problem in the early 2000s. Attracted by the easy revenue banks had gradually increased the charges levied on consumers who paid late or exceeded their overdraft limit. Campaigns from consumers groups encouraged people to challenge their charges – banks received millions of complaints. Despite insisting that there had been no breach of the law in imposing these charges banks refunded over £560 million to consumers. But these complaints were placed on hold whilst the Office of Fair Trading and the banks commenced a court case to determine whether the OFT could assess whether the level of the charges was fair.

OFT loses Supreme Court case on bank charges

In November 2009 the OFT lost the case at the Supreme Court, this overturned previous judgments at the High Court and Court of Appeal. This meant that the OFT had no power to assess whether unarranged overdraft charges were fair. Instead of continuing legal action the OFT instead opted for voluntary discussions with banks about the way forward. It was interested in further improvements giving consumers greater control over whether they used unarranged overdrafts and increasing the transparency of charges.

Regulators work with banks on voluntary solutions

This began a long series of discussions with the banks about what should be done. Standards were developed for allowing consumers to opt-in and opt-out of unarranged overdrafts. Annual statements were developed giving consumers a summary of the charges they had incurred each year.

Overdraft charges were also included in the CMA’s investigation into retail banking which ran from 2014-2016. The CMA recommended that banks should introduce a monthly maximum charge but gave the banks complete freedom as to where this should be set. The CMA also recommended the introduction of ‘Open Banking’ enabling consumers to share their bank transaction data with third parties which will support the development of new services.

Stronger action taken on payday loans

Other forms of high-cost credit were subject to stronger regulatory action – following a duty imposed by Parliament the FCA introduced a cap on payday loans, but the definition of High-Cost Short-Term Credit subject to the charge cap specifically excluded bank overdrafts. Consumer groups continued to point out that the cost of many bank unarranged overdrafts exceeded the cost of payday loans.

Consumers have paid £10 billion in unarranged overdraft charges

Unarranged overdraft charges remain too high, too complex and too difficult to compare. Banks exploit consumers who are in financial difficulty or make small mistakes with charges that far exceed the actual costs incurred by the banks. Since the Supreme Court case was lost consumers have paid more than £10 billion in unarranged overdraft charges. Regulators concentrated on giving consumers information about the overdraft charging structures and levels – expecting consumers to be a cross between Nostradamus and Einstein to work out which was cheapest. Annual summaries of charges proved to have no impact in helping consumers reduce overdraft charges or increasing switching rates. These interventions were not totally ineffective – text message prompts helped reduce charges. But these worked for consumers with mobile banking and with spare money to move over from other accounts to avoid the charges.

New City Agenda event on the Future of High Cost Credit

At the New City Agenda event, Andrew Bailey outlined the FCA’s findings from its High-Cost Credit review. On overdrafts he said:

“Data received from personal current account providers show that annual revenues from unarranged overdrafts, excluding unpaid item fees, were around 200% of the average amount outstanding in 2016, with a range of 100 to 440% across the firms we looked at. For arranged overdrafts, it is around 25%, with a range around 14 to 38% across the firms. We are looking at whether this difference can be justified. Unarranged overdraft fees and charges also appear to be highly concentrated: while around 20% of personal current accounts received charges for using an unarranged overdraft in 2016, over half of the charges were concentrated on just 2% of accounts.”

Mentioning continuing calls from consumer groups for caps on overdraft charges he added:

“I am aware that some stakeholders have called for us to introduce price capping in other areas of the high-cost credit world, and overdrafts. We are examining a range of potential approaches to address the harm we see to consumers using these products, and I expect to set out our views in the next month. As I have said, these will be tailored to the particular harms we have found in different markets – we will be consistent in applying the principles I have set out, but that does not imply that our solutions for different markets will be the same.”

The FCA had previously been nervous about introducing specific price caps for elements of the financial services sector. So far, the only sectors subject to this form of intervention have been payday lending, auto-enrolment pension schemes and pension exit charges. All three of these interventions were prompted by direct instructions or duties imposed by Parliament.

FCA action on overdrafts

In broad terms there were two possible options for the regulator:

A wait and see approach, placing faith in improved information and technological change: It could say that the market is currently in flux, Open Banking is being introduced and this might lead to new technological approaches to providing overdrafts and increase competition leading to lower charges. Banks are currently implementing the recommendations from the CMA for better alerts and monthly maximum charges and we should see how these work before introducing further changes. Some banks have already made changes to their overdraft charging structures.

Introduce a cap on unarranged overdraft charges: It could say that information-based solutions have not been successful in ensuring good conduct across the market and that Open Banking could be too slow to put competitive pressure on banks to reduce charges. It could propose a cap on unarranged overdraft charges and begin a consultation on how the cap should be structured and the level at which it could be set. Broadly there are 3 possible options for the structure and level of the cap.

  • Restrict the level of unarranged overdraft charges equivalent to that of arranged overdrafts which would mean that banks wouldn’t be able to ratchet up the charges for those using their unarranged overdraft
  • Apply the current level of the cap on High Cost Short-Term Credit to unauthorised overdrafts, meaning that interest rates would be no more than 0.8% per day
  • Restrict unarranged overdraft charges to the net additional administrative costs which banks incur when consumers exceed their overdraft limit, just like in other markets like mortgages where banks are prohibited from levying excessive charges on those in mortgage arrears.

Announcement to restrict charges

It is now clear which way the FCA will jump on unarranged overdrafts. Banks have got away with excessive charges for years – costing consumers more than £10 billion since the OFT lost the Supreme Court case in 2009. The FCA has taken the opportunity to act now to stop consumers from incurring further detriment.