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Major changes to UK bank overdraft fee regulations

4 min read

12 July 2019

New rules for banks and building societies regarding regulations for overdraft fees have been announced by The Financial Conduct Authority (FCA).

 The recent changes are said to be the biggest ‘shake up’ in overdraft financial regulations of this generation, making overdrafts “simpler, fairer, and easier to manage.” The new regulations will be effective from 6th April 2020.

The new rules will mean that:

– Banks and building societies are restricted from charging fixed routine (daily/monthly) fees on the overdrafts they offer

– Overdraft fees will not be allowed to increase when account holders go over their unplanned overdrafts

– Banks will only be able to charge a simple interest rate on their overdrafts per annum; with this rate having to be displayed clearly and obviously for any and all potential applicants

– Banks will be required to be more vigilant in identifying, and helping, customers who are shown to be financially struggling

It seems that one of the biggest issues with the unplanned overdraft rates is the lack of clarity on the various overdraft fees, often leaving customers unsure what they will be charged if they go into an unarranged overdraft.

Unauthorised overdraft fees worse than payday loans

In some cases, the cost of unauthorised overdraft fees can be as much as £80 to £100 for every £100 borrowed. This makes an unauthorised overdraft the most expensive form of loan available, at almost four times more than payday loans, according to All Purpose Loans.

Andrew Bailey, the Chief Executive of the FCA, has commented on the matter, pointing out that this area of lending was “dysfunctional”, and that:

“Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges, that are both a result of and driver of poor competition”.

Bailey continues:

“The decisive action we [the FCA] are taking today will give greater protections to millions of people who use an overdraft, particularly the most vulnerable.”

The changes will mean banks cannot increase charges when account holders go over their planned overdraft limit. However, there will be no restriction to the cost.

In response to the FCA’s announcement, key figures in the industry, like UK Finance’s Eric Leenders, claim that:

“Overdrafts can provide a convenient way for customers to smooth their short-term cash-flow, and there is a highly competitive market in the UK. The banking industry is committed to helping customers manage their money and we will be working closely with the FCA to implement these rules.”

The FCA’s new regulations aim to stop unreasonably high fees from being applied to overdrafts, and with that, to reduce the amount of debt suffered by those in the UK. Some have claimed that the fees on unplanned overdrafts are greater than those of pay-day loans. The FCA has set out to support people in financial difficulty by preventing the staggering rates sometimes applied to unplanned overdraft today.

Other industries currently under review include guarantor loans, car finance and catalogue finance.

Industries that are still unregulated in the UK include cryptocurrencies, bridging loans, invoice finance or asset-backed lending.