New overdraft reform – what does it mean for you?
The Financial Conduct Authority (F.C.A) recently announced that it is introducing reforms to fix what it describes as a dysfunctional overdraft market. These changes aim to make overdrafts simpler, fairer, and easier to manage and will protect the millions of consumers that use overdrafts, particularly more vulnerable consumers. The changes represent the most significant overhaul to the overdraft market for a generation, but what does the overdraft reform mean for you?
In 2017, firms made over £2.4bn from overdrafts alone, with around 30% of that being made up from unarranged overdrafts. Surprisingly, unarranged overdraft fees can be more than ten times as high as fees for payday loans, in some cases.
In addition to this, complex charging structures mean that 80% of consumers cannot correctly choose the most affordable overdraft deal at present. 52 million people currently have a current account and 26 million of those are overdraft users.
What does it mean for you?
The new reform will be implemented by 6th April 2020. However, a few of the measures will be in force sooner.
- Banks and building societies can no longer charge more for unarranged overdrafts – starting 6 April 2020.
- Fixed daily and monthly fees are banned, and you will no longer be charged for just having an overdraft – starting 6 April 2020.
- The price of an overdraft will be a simple, annual interest rate to make it easier for consumers to understand – starting April 2020.
- Banks and building societies will be required to advertise arranged overdraft prices with an APR, so that customers can compare them against other products – starting April 2020.
- Firms must follow new guidance to ensure that refused payment fees are fair, meaning that fees passed on to the consumer should reflect what the bank or building society pays to refuse the payment – starting immediately.
- Banks and building societies will be required to do more to identify customers who are showing signs of financial strain or are in financial difficulty and develop and implement a strategy to reduce repeat overdraft use – starting 18th December 2019.
F.C.A research with consumers showed that they wanted to see the cost of borrowing in pounds and pence, as well as an APR and the overall interest rate. UK Finance has agreed to implement this alongside the F.C.A’s reforms.
Previous overdraft reform announcements
The FCA has previously announced a series of reforms to help all consumers understand their overdrafts following a consultation last year. From 18 December 2019, banks will be required to implement the following remedies:
- 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.
- Text message or push notification alerts and changes to display overdrawn balances at cash machines to address unexpected overdraft use.
Andrew Bailey, Chief Executive of the Financial Conduct Authority, said:
‘The overdraft market is dysfunctional, causing significant consumer harm. Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, which are often ten times as high as fees for payday loans. Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges, that are both a result of and driver of poor competition.
‘Our radical package of remedies will make overdrafts fairer, simpler and easier to manage. We are simplifying and standardising the way banks charge for overdrafts. Following our changes, we expect the typical cost of borrowing £100 through an unarranged overdraft to drop from £5 a day to less than 20 pence a day.
‘The decisive action we are taking today will give greater protections to millions of people who use an overdraft, particularly the most vulnerable.’
Free budgeting templates
If you need help in creating a budget that will aid you in reducing your reliance on an overdraft, then we have free templates that you can download here.
We also offer a complimentary, no obligation, 30 minute consultation to anyone who would just like to chat through their concerns, worries or run their thoughts past a finance professional to get peace of mind before making any financial decisions. Our Life Centred Planners are friendly and approachable and love to share their expertise so that you can create a brighter future for yourself and your family. Contact us today to arrange an appointment.
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