Improved overdraft rules brought in by the FCA have reduced high fees for unarranged borrowing, removed complex charging structures and introduced help for those who were repeatedly using their overdraft.
The £1 billion in savings for customers is from two separate measures the FCA introduced. This includes:
More than £500 million saved due to pricing rules that came into force in April 2020.
Approximately up to £486 million saved due to measures to help customers manage repeated overdraft use, which came into force in December 2019.
The evaluation, published today, found each customer who had an arranged overdraft or access to an unarranged overdraft saved, on average, £17.40 in charges in 2021 due to the new pricing rules.
The FCA estimates that the 30% of consumers living in the most deprived areas in the UK saved £153 million in 2021.
Sheldon Mills, Executive Director, Consumers and Competition at the FCA, said:
‘We know that overdrafts offer a convenient way to help some people manage temporary cash flow issues, but some banks were charging more than 80% APR (Annual Percentage Rate) on arranged overdrafts, once fees and charges were factored in.
‘The action we took to simplify overdraft charges and to tackle high unarranged overdraft fees has saved people across the UK almost £1 billion in total.
‘Such savings are vital as people manage cost of living pressures. We expect banks and building societies to price fairly and support those in difficulty and we encourage consumers to shop around for the best current account to suit their needs.
‘We expect banks to work with customers, who repeatedly use their overdrafts, to help them understand the options available to reduce their reliance on overdrafts.’
The rules on pricing required firms to stop charging fixed fees for overdraft borrowing, to charge no more for an unarranged overdraft than an arranged one, to price overdrafts with a single annual interest rate, and advertise overdrafts with a representative Annual Percentage Rate.
The FCA’s new rules are also aimed at encouraging competition in the market.
Firms must also now identify and take action to support customers who frequently use their overdraft, resulting in high cumulative charges that are either harmful to the customer or show that the customer is experiencing or at risk of financial difficulties.
The FCA estimates that consumers will save between £88m and £105m in charges a year from now on due to our actions to tackle repeat use.
Overdrafts are intended for short-term or emergency use so consumers should consider other methods of credit if they find they need to borrow for longer.
Good practice
Today, the FCA has also published examples of good practice and areas of concern by firms, following our review of their strategies to help customers who are repeat users of their overdrafts.
While many of the firms were meeting the FCA’s expectations, gaps were found particularly about how firms monitor and review the effectiveness of their policies and procedures for customers who repeatedly use their overdraft. All firms included in the review will be sent the good practice examples so they can improve where necessary.
Notes to Editors
Read the full evaluation report.
For one customer, the savings were significant:
Before our intervention, the customer paid a daily fee for arranged borrowing of £0.17 and a monthly fee of £5.39. After our rules, the same person paid an interest rate of 26% EAR on average. Borrowing £100 for one month under the old pricing structure would have cost the consumer £10.49, while under the new pricing structure, borrowing the same amount would have cost them £2.16.
For the same customer, unarranged borrowing was priced by a £2.50 daily fee, which meant that if they borrowed £100 through unarranged borrowing for a month, they would have had to pay £70. Under the new pricing structure, the same amount of borrowing through unarranged overdraft would have cost them no more than the arranged price for the same amount – £2.16.
Rules which require firms to identify customers who are showing signs of financial strain or are in financial difficulty and develop and implement a strategy to reduce repeat use, came into force in December 2019.
People who need help with credit and debt information can get free and impartial advice from the MoneyHelper website provided by the Money and Pensions Service.
In 2021, the number of overdraft users was 15 million, while arranged and unarranged overdraft users were 11 million and six million, respectively.
The FCA monitors and evaluates the impact and effectiveness of its interventions so it can continually improve its performance. The FCA’s analysis found that charges and borrowing reduced for consumers on the repeat use strategies at all six of the firms assessed.
The FCA has reminded all lenders of how they should support borrowers in financial difficulty as they deal with cost of living rises.
