Recently announced legislation by the Financial Conduct Authority (FCA) in the UK has set out rules to prevent banks and building societies from charging often extortionate fees to unarranged overdraft facilities. These rules will come into effect in April 2020 and will change the nature of overdraft facilities in the UK significantly.
At present, arranged overdraft facilities for bank accounts in the UK have significantly lower charges attached to their than unarranged overdrafts. This has meant that in recent years, more and more people are being charged, often many times the amount attached to payday loans, making overdrafts particularly costly.
This has impacted not just the pockets of many UK bank account holders, but also many peoples’ credit ratings; as they fail to repay an unarranged overdraft immediately, the charges roll on, costing them more and impacting their chances of getting credit, mortgages, getting access to future finance and even the money they may need to borrow to renovate their existing home (more information).
In relation to the housing market and construction sector in the UK (which has seen a slowdown in recent months), reducing the amount of debt people have outstanding in the form of unarranged overdrafts, should allow consumers the money they need to invest in their properties. This should see the value of such properties increase, in turn increase, stimulating the housing market, particularly as more relaxed planning permission laws come into effect in the coming months (source: RJ Acoustics).
What will these rules mean for customers?
Once these rules come into effect in 2020, the FCA have said that they will make overdrafts in the UK ‘simpler, fairer and easier to manage, protecting the millions of consumers, and particularly the more vulnerable ones, who use overdrafts.’
In practice, this will mean that much like the payday loans market, which has been effectively and sensibly regulated by the FCA to prevent unscrupulous companies charging customers well over the odds, overdraft providers such as banks will not be able to charge whatever they want. This will give consumers more stability and parity in the market as well as peace of mind that they will not be ripped off by their bank or building society.
In 2017 alone, UK banks and building societies made more than £2.4 billion in overdraft charges and fees, with around a third of this coming directly from unarranged overdraft charges and this is something that the FCA (as well as many consumers) see as unfair and immoral.
The FCA are also introducing these rules to reduce not just the cost of borrowing, but to reduce the amount of unnecessary borrowing in the UK altogether.
FCA Chief Executive Andrew Bailey said of the new rules that: “the overdraft market is dysfunctional, causing significant consumer harm.”
It has been estimated that it costs consumers around £5 per day when there is an unarranged overdraft outstanding, whereas with the new rules coming into effect, this should drop significantly to closer to 20p per day.
A further move by the FCA as part of this regulation will see ‘refused’ fees (those charged when a service is refused, such as a cheque bouncing) also capped, with associated fees set to fall from from around £5 per day to closer to £2 per day.