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Banks asked to explain overdraft rate hikes

Paloma Kubiak
Written By:
Paloma Kubiak

The financial regulator has asked major banks to provide details of how they set their new overdraft rates at around 40%.

In the lead up to new rules coming into force in April, major lenders have revealed their new overdraft pricing structure, which includes using a single rate for both arranged and unarranged overdraft customers and ditching monthly and daily fees.

While the lenders are adhering to rules set out by the Financial Conduct Authority which means they can’t charge more for unarranged overdrafts than arranged overdrafts, they have been criticised for hiking rates to as high as 50% for all customers going into the red.

The majority of customers will be better off as a result of the banks aligning overdraft charges, but the FCA has requested they provide evidence of how they set their overdraft rates and what measures are in place to help those adversely affected by the new pricing structure.

It has written to banks asking them to supply the following information:

  • Which internal and external factors were considered in setting new overdraft rates
  • A timeline of key decisions, particularly, where any revisions to the rates were taken
  • A summary of meetings and minutes of meetings if available, where setting the new overdrafts rates was discussed
  • Any pricing paper proposals that were put to the decision-making committee.

However, the FCA said this is a voluntary request so banks don’t need to supply the information.

The FCA added that the market reforms have ended high unarranged charges, saving typical borrowers up to £55 per month on an unarranged overdraft of £100 over seven days.

It said: “Confusing fees and charges have been banned, and the cost of overdrafts has been made more transparent. For many occasional borrowers the removal of fees means they will pay less even though their headline rate of borrowing may increase.

“We will be keeping a close eye on the market and we will act should we see continued harm.”

‘Costs faced by those in arranged overdrafts are set to balloon’

Tom Selby, senior analyst at AJ Bell, said: “The FCA is clearly concerned at the significant negative impact its overhaul of lending rules will have on those with large arranged overdraft balances.

“While the intention of the reforms was to help those hit with eye-watering daily charges on unarranged overdrafts – a substantial proportion of whom tend to be people from deprived areas – there has been something of a waterbed effect. In the process of pushing down on unarranged fees, the costs faced by those in arranged overdrafts are set to balloon.

“Millions of people in arranged overdrafts are now worried about their borrowing costs doubling overnight, potentially pushing many into a difficult financial position. The FCA has clearly been jarred by the reaction of the market and is now leaning on firms to help customers affected by the imminent rise in costs.

“We will have to see whether banks react to this increased regulatory scrutiny. However, in the meantime borrowers should take action today to ensure they mitigate any negative impact on their finances.”

Peter Tutton, head of policy at debt charity StepChange, said: “We welcome this step from the FCA. The new rules on overdraft charges are absolutely necessary to end a longstanding cause of harm to the most financially vulnerable customers.

“But the FCA now need to be watchful that banks do not perpetuate unfairness or financial harm in another form. It is important that consumers see the new pricing as fair and competitive; and the FCA needs to be sure that the repeat use rules are effective in preventing more people from getting trapped in a cycle of expensive and harmful overdraft debt.”