Ban on banks charging rip-off unarranged overdraft fees in high cost credit crackdown
Banks charge customers up to £80 for £100 unauthorised overdraft taken out over 30 days
BANKS to be banned from charging rip-off unauthorised overdraft fees in a crackdown on high cost credit, the City watchdog revealed today.
They will also have to charge one single interest rate for overdrafts, rather a mix of a fee and interest rate.
At the moment, banks often charge between £2 to £30 a month for an arranged overdraft, while an unarranged fees can be much higher - up to £6 a day or £80 a month.
This is often explained by a fixed daily fee which can vary based on the amount borrowed plus an interest charge.
This can be confusing for customers when trying to work out how much they are being charged.
Under the new rules firms will be banned from offering tiered fees. They will be allowed to still offer a fee free amount which could act as a buffer.
Although, the FCA has refused to cap overdraft rates which has been criticised by campaign groups and experts as not going far enough to protect customers.
Martin Lewis, founder of MoneySavingExpert.com said: “The FCA’s consultation is on the right track – though our main disappointment is it fails to impose the total cost cap, which it’s applying to other high-cost credit sectors like payday loans and rent-to-own."
Joanna Elson OBE, chief executive of the Money Advice Trust, urged the FCA to keep the “option of introducing a price cap should remain firmly on the table.”
Personal finance expert and founder of Moneycomms, Andrew Hagger warned that the change could lead to the end of free banking.
He said: "It will be interesting to see how the banks react.
This is how much it costs to borrow £100 over 30 days in an unarranged overdraft"Will they charge sky high interest rates for overdrafts, instead of hiding behind complex tariffs or will they look to recoup lost revenue by charging monthly fees for all current account customers?
"The end of free banking could become much more of a reality because of this move."
The Financial Conduct Authority said the changes would help "millions of people who use an overdraft, particularly the most vulnerable."
Andrew Bailey, chief executive of the FCA said: " It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform.
"We are proposing a series of radical changes to simplify the way banks charge for overdrafts and tackle high charging for unarranged overdrafts.
"These changes would make overdrafts simpler, fairer, and easier to manage.";
WHAT ARE THE BEST WAYS TO CUT YOUR OVERDRAFT COSTS?
THERE are a few ways, and which suits you will depend. Here are a few options advised by Money Saving Expert's Helen Saxon
Spend less each month – do a proper budget and have a look at what you’re spending on.
Could you cut your morning coffee, or go down a brand at the supermarket?
Or, are you paying too much on your bills – if you haven’t switched energy, insurance and broadband recently, then it’s likely you could save £100s or even £1,000s over a year.
Move your bills – this can be dangerous if you’re not disciplined, but if you move your bills to just before payday rather than just after, many will be in credit (or less in the red) for less of the month, meaning you’re charged less for the overdraft. But – remember those bills are coming out, so don’t treat it like you’ve extra money to spend.
Move bank account - There's plenty to choose from and you can end up saving money.
Shift your overdraft on to a money transfer card – and don’t build it back up again. We cover this below.
Try setting up "pots" - Sort your cash at the start of each month, so you have a bills pot, a spending pot etc. Use this technique to make payments to your overdraft, eg £100 a month, treating it like any other bill.
The FCA plans to make an announcement on these plans in June next year, after consulting with banks.
They earned £2.4billion from overdrafts in 2017, with nearly a third of which is from unarranged overdrafts.
It's only 1.5 per cent of customers who are hit with these charges, with the majority of them paying about £450 a year.
In May, we revealed how overdraft fees can cost MORE than a payday loan.
The FCA also proposed new rules for store cards and catalogue credit including a crackdown on buy now, pay later offers.
It also plans to introduce new rules for people taking out doorstep loans, including forcing firms to explain clearly to customers about the cost of taking out another loan on top of an existing ones.
In March, The Sun launched its Stop The Credit Rip-Off campaign to help the millions of families who suffer due to high cost credit, such as doorstep lenders and rent-to-own firms.
In May the FCA revealed plans to cap rent-to-own firms and overhaul overdrafts and tighten rules for doorstep lenders.
MOST READ IN MONEY
Last month, the FCA confirmed that rent-to-own firms would be stopped for charging hundreds of thousands of customers more than double for essentials like beds, cookers and sofas.
Debt charity StepChange estimates that last year alone, 1.4million lower-income households resorted to high-cost credit like rent-to-own agreements, payday and doorstep loans, up from 1.1million in 2016.
In February new rules forcing banks to alert customers via text message before they slip into the red came into force.
We provided advice on the alternatives to high cost credit, explained the steps you can take to get out of debt and revealed how you might be able to get a refund on a doorstep loan or high cost credit agreement.
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