The Analysis Comment
Getting over the issues
The regulator’s new overdraft rules will mean that seven out of 10 consumers will be better off or see no change
Christopher Woolard Executive director of strategy and competition, the Financial Conduct Authority
Across the market, seven out of 10 overdraft users will be better off or see no change, when new rules on overdrafts, introduced by the Financial Conduct Authority (FCA), come into force in April. Around 14 million people use an
unarranged overdraft each year, and all of these users will be better off or see no change. The FCA’s work highlighted that unarranged overdraft prices were regularly 10 times – and for some consumers as much as 20 times – as high as for payday loans. Customers at some large banks were charged effective arranged overdraft rates in excess of 80% per year once fees and charges are factored in. The cost of borrowing £100 through an
unarranged overdraft is expected to drop from a typical £5 per day to under 10p per day.
Better off For an unarranged overdraft user borrowing £100 for seven days the changes to the market could see them better off by as much as £55.35 a month. Those who use their arranged overdraft to
borrow smaller amounts, are more likely to be better off. Some borrowers who use their arranged overdraft to borrow larger sums can now see the true cost of borrowing. Where prices have increased, the FCA encourages people to shop around and consider using cheaper forms of borrowing, such as a 0% credit card, other credit card or alternative products. Firms must now charge a simple annual interest rate – without
additional fees and charges for using an overdraft. This means that while headline interest rates have increased, the cost of borrowing has gone down or remained unchanged for most people.
Comparison It will also be easier for everyone to understand what they are paying, and to compare overdrafts between different providers and different
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effective arranged overdraft rates in excess of 80% per year once fees and charges are factored in
charged
Unarranged overdraft prices were regularly 10 times – and for some consumers as much as 20 times – as high as for payday loans. Customers at some large banks were
forms of credit. FCA research previously found that four out of five overdraft users could not work out which of a range of overdraft models was the cheapest. Our changes expose the true cost of an
overdraft. We have eliminated high prices for unarranged overdrafts. This will result in a fairer distribution of charges, helping vulnerable consumers, who were then disproportionately hit by high unarranged overdraft charges, and many people who use their overdraft from time-to-time. Seven out of 10 overdraft users will be
better off or see no change. At two banks that figure is nine out of 10. Consumers can now see how expensive overdrafts really are.
Shopping around Those who are worse off should consider shopping around to find a cheaper deal. Credit and other forms of borrowing can be significantly cheaper for long-term users. Out of the six largest retail banking
groups analysed, there are some scenarios where consumers will pay more. People who are likely to pay more for an
overdraft are those borrowing larger amounts for longer periods of time, who should consider alternatives to borrow more cheaply.
Overdrafts were not designed to be used for large amounts for
long periods of time. Consumers should consider other methods of credit if they find they need to borrow for longer.
Fair treatment In addition to this, we have made it clear that firms have to treat all customers who are affected by changes to their charging structures fairly. In particular, firms must identify customers adversely impacted and take steps to support them if they are in difficulty. CCR
www.CCRMagazine.com March 2020
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