Home Business Insights & Advice UK bank overdraft fees to experience ‘major’ shake-up

UK bank overdraft fees to experience ‘major’ shake-up

by John Saunders
25th Jun 19 12:27 pm

The high fees commonly associated with bank overdrafts is to get a major shake-up, the FCA reports.

Customers using debit accounts and credit cards can dip into their planned or unplanned overdraft as a safety net, but the fees are often exorbitant and significantly more expensive than payday loans.

Using a planned overdraft facility can cost between £5 to £30 per £100 borrowed (similar to payday loans), with unplanned overdrafts costing as much as £80 or £100 per £100 borrowed, making it four times the cost of payday loans.

The FCA has plans to introduce new rules for banks whereby they will no longer be able to charge fixed daily or monthly fees for overdrafts. In addition, the fees for unplanned overdrafts will be the same as for arranged ones.

The FCA have stated that these new rules will come into play in April 2020, and will be the “biggest overhaul for a generation.” Banks have already had to send SMS notifications to customers when they do into their overdraft, and whilst this has already saved consumers millions, further legislation is to be introduced.

Banks will now also be forced to charge an annual rate of interest on every overdraft, which needs to be advertised clearly to help consumers compare products.

UK banks made over £2.4 billion from overdrafts in 2017, with around 30% generated through unplanned overdrafts.

The FCA have claimed that the changes will make overdrafts “simpler, fairer and easier to manage.”

When the new rules come into force, banks will still be able to refuse to make a payment if a customer doesn’t have the funds to repay it, but any resulting fee for them must reflect the cost to the bank.

Banks will also have to carry out more research to identify and aid customers who might be showing symbols of financial difficulties or strains.

According to the FCA, the new rules will mean that the typical cost of borrowing £100 through an unarranged overdraft will drop from £5 a day to less than 20p. However, there has been some concern that those who previously used arranged overdrafts may face higher charges.

Gillian Guy, who is the Chief Executive of the Charity Citizens Advice, has said that overdrafts were one of the biggest areas of concern for the charity as large numbers of consumers would contact them about these.

Guy stated “Overdraft charges are able to have serious knock-on effects for people’s debt and mental health. These new rules should help thousands of people from getting trapped in a debt spiral”

She also claimed that if, after the new rules are introduced, people are still having to pay well over the odds, FCA should introduce an interest rate cap. This would be to ensure that no one has to pay back more than double the amount that they borrowed.

This news will come as a delight to the millions of UK account holders who rely on using their overdrafts to see them through the month. Furthermore, the low fees that will be introduced in 2020 avoid customers using high cost bad credit loans or other high cost alternatives, that may also impact their credit scores.

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