Are UK Overdrafts Changing?

Major changes are afoot in the UK banking and overdraft market as the industry watchdog steps in. The Financial Conduct Authority said that they would be changing the rules around unarranged overdraft accounts in June 2019. The new rules are set to come into place in April 2020. The FCA also regulate payday loan direct lender companies, insurance companies and consumer credit providers. They continue to change-up the rules for UK financial services industry, with the intention of helping to protect consumers.

Why Are The FCA Getting Involved With Overdrafts?

The FCA are getting involved with unauthorised overdrafts. Unauthorised overdrafts come into play when a consumer spends more money than they have in their bank account, so rather than the payment being rejected or declined, they go into an unplanned overdraft. The costs incurred from unauthorised overdrafts can vary greatly, but research released in 2019 by the FCA indicated the huge discrepancies between how banks charge for their overdrafts.

In fact, some banks could charge £5 per day for being in an unauthorised overdraft. After the new regulation, this fee could plummet to 20p per day or less. The fees are unequal and can be considered unfair. Individuals that come from low-income households or have limited resources are more likely to go into an unarranged overdraft. Incurring fees as high as £5 per day could be unrealistic to repay and could cause a debt spiral, in which consumers need to seek other credit or take on other financial help to pay off. This is the definition of problem-debt. The FCA’s regulations are designed to better protect at-risk individuals.

As previously mentioned, the FCA already regulate the payday loan industry. They took over as the main authority in the sector because interest rates, late fees and other regulations were not serving consumers as well as they should. Today, reports show that some unauthorised overdrafts have 10 times as high fees as payday loans.

What Does This Mean For Banks?

The new regulations will affect banks, building societies and institutions that provide personal current accounts. The regulator has published a report that companies can use to restructure their overdraft rules.

Interestingly, banks have been requested to put together a strategy to reduce the number of repeat overdraft users. They will have to produce the results of their overhauled rules for the FCA to measure effectiveness moving forwards. This means the financial industry can expect ongoing changes.

The changes to overdraft guidelines could be a real challenge for banks. Reports indicate that they generate a lot of revenue for banks, making approximately £2.4 billion in 2017 alone. Cutting profits and incoming money this much might see traditional high street banks give way to FinTechs and alternative credit options. Alternatively, and perhaps more concerningly, it could result in higher arrange overdraft costs for consumers, to offset the cost of monitoring that the FCA require and the loss of income.

What Does This Mean For The Consumer?

26 million Brits use an overdraft. Although some of these are planned, a lot of consumers are currently dealing with complex pricing structures for their overdrafts. The FCA suggest this could be a result of low consumer awareness, wherein they use an unarranged overdraft to bridge a temporary financial gap or pay for an emergency but are unaware of how much it is going to cost them.

The new system is designed to make everything simpler. It could also encourage consumers to talk to their bank about arranging an overdraft, rather than neglecting their financial self.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.