The Financial Conduct Authority has today announced some wide ranging proposals to overhaul the overdraft market.
The key changes it is looking for are:
- Ensuring the price for each overdraft will be a simple, single interest rate – no fixed daily or monthly charges.
- Tackling the highest costs in the market by stopping firms from charging higher prices when customers use an unarranged overdraft.
- Banning fixed fees for borrowing through an overdraft.
- Mandating that arranged overdraft prices must be advertised in a standard way, including an APR to help customers compare them against other products.
- Digital eligibility tools that allow customers to check if they can get a cheaper overdraft with another provider.
- Overdraft charge calculators that help customers translate interest rates into pounds and pence.
This is a much needed move which will prevent customers getting a raw deal on both arranged and unauthorised overdrafts.
The banning of fixed fee overdrafts is long overdue as they are simply punitive, particularly for those who borrow short term or relatively small amounts – for example with TSB, NatWest and RBS if you are overdrawn for one day then a monthly overdraft usage fee of £6 is levied.
The banks have tried to claim that fixed fee charging is easier for customers to understand – that might be so but such ‘transparency’ comes at a huge cost for the borrower.
Forcing all banks to go back to using a simple interest rate tariff is an excellent move by the FCA and will allow people to compare the cost against rival banks.
It will be interesting to see how the banks react – will they charge sky high interest rates for overdrafts, instead of hiding behind complex tariffs or will they look to recoup lost revenue by charging monthly fees for all current account customers? – the end of free banking could become much more of a reality because of this move.