Will the FCA tell banks to slash overdraft charges?

Posted 18 September 2017

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The financial watchdog is looking into ways to tackle unarranged overdraft charges.

The Financial Conduct Authority (FCA) has launched an investigation into the area of high cost lending, including the fees banks charge for unarranged overdrafts.

What might change?

You may have heard the recent news that Lloyds Banking Group has decided to get rid of all unarranged overdraft fees for its customers from November this year. So that includes Halifax and Bank of Scotland customers too, as they are part of Lloyds. And as the FCA focuses on this area, other banks could decide to do the same.

We don’t yet know if the FCA will decide to change the rules about this type of lending but they could decide to introduce a cap on the amount that banks are allowed to charge people – as they did with payday loans. Or they could start making banks complete an affordability check, before they lend to someone on an unplanned basis, or even ban unauthorised overdraft charges altogether.

Whatever the FCA decide to do, they have made it clear that maintaining the status quo is not an option and they’ve pledged to do something to bring the charges down.

What’s an unarranged overdraft?

Overdrafts are just another form of loan or borrowing.

An arranged overdraft means that you’ve agreed a borrowing limit with your bank in advance (and to stick within it). Typically, these have lower charges than unarranged overdrafts – but still may include usage fees and daily interest.

If you go into an unarranged overdraft, it means you’ve started borrowing money from the bank without agreeing it with them first. Whilst your bank may allow you to withdraw or spend more than you have in your account, they often impose hefty charges.

The FCA have identified that these charges are often not just high, but also complex. According to the regulator, many people don’t know they’re using an unarranged overdraft or how much they are being charged. In some cases, these fees can work out to be more expensive than taking out a payday loan.

Is it just overdraft charges?

Overdraft charges aren’t the only area of high-cost lending that is under review from the FCA. They are also going to look into car finance deals with the intention of making them easier to understand for consumers.

They have also expressed concerns about the rent-to-own market. This is the type of arrangement where someone buys home furnishings or appliances on finance and then they pay something towards it each month. In some cases, consumers can end up paying three to four times more than they would if they had paid for the item in cash.


by Christine Walsh

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