Millions of people will have seen changes to their available bank balances this week as new overdraft rules from the financial watchdog covering how overdrafts are displayed come into effect.
The Financial Conduct Authority (FCA) has ordered UK banks to stop including overdrafts in funds marked as ‘available’ to customers, in a move designed to make it clear that overdrafts are a form of debt, rather than the customer’s own money, City AM reported.
“Unfortunately, too many people fall into the trap of believing that’s their money rather than a debt,” FCA director Christopher Woolard told Radio 4’s Today programme.
The regulator is hoping the change will stop customers accidentally dipping into their overdraft, or becoming confused about their actual bank balance. The rule change is of a wide-ranging shakeup of overdrafts announced by the FCA in June to “fix a dysfunctional overdraft market”.
Under measures that will come into force in April next year, banks will be prevented from charging more for unarranged overdrafts than for arranged ones.
Fixed fees for borrowing through an overdraft will also be banned, and banks will be required to advertise arranged overdraft prices with an annual percentage rate to make it easier for customers to compare different accounts.
“These important changes will give consumers more clarity about their finances and should help them make informed spending decisions and avoid going into the red,” said Gareth Shaw, head of money at Which?
“We hope to see more banks now coming forward with competitive overdraft pricing and for the regulator to ensure that its transformation of current account overdrafts delivers for customers,” he added.
Over half of the UK’s 52m current account holders use overdrafts, which generated £2.4bn revenue for banks in 2017, according to the FCA.
Under the new rules, the watchdog expects to see the typical cost of borrowing £100 via an unarranged overdraft to fall from £5 per day to less than 20p per day.
Some banks have already raised fees in anticipation of the new rules coming into force, including:
- Nationwide was the first lender to announce a shake-up of its overdraft pricing in response to the new FCA rules. The building society announced in July that it would set its effective annual rate (EAR) for overdrafts at 39.9% for all customers from October. The new flat rate is over double the 18.9% Nationwide used to charge standard current account customers for its overdraft.
- HSBC announced it would raise overdraft fees currently set between 9.9% and 19.9% APR to 39.9% for all customers with arranged and unarranged overdrafts. The rules will come into effect from March, and HSBC said it expects them to adversely affect three out of 10 customers who use an overdraft.
- Monzo is scrapping its daily fixed overdraft fee of 50p, replacing it with a risk-based system charging customers up to 39% from April. The challenger bank’s new overdraft pricing will change customers an EAR of 19%, 29% or 39% depending on their credit score. Monzo is also scrapping its free £20 overdraft buffer. The bank said that 87% of its customers would either be better off or receive monthly charges of less than £1 under the new system.
- Starling Bank is also introducing a sliding EAR rate dependent on customers’ credit scores, charging them either 15%, 25% or 35%. It had previously charged customers a single flat overdraft rate of 15%.
- First Direct customers are set to be charged 39.9% EAR from next year on any overdraft over £250. The bank is also scrapping its £5 daily usage fee for unarranged overdrafts, and reducing the maximum monthly cost of using the facility to £20.
- M&S Bank is also introducing a 39.9% EAR charge for all overdrafts over £250. It is also removing its current £50 buffer on unarranged overdrafts, which means customers will no longer be able to go over their overdraft limit by any significant amount without facing charges.