You are here: Home - Credit Cards & Loans - News -

Banks asked to explain overdraft rate hikes

0
Written by: Paloma Kubiak
28/01/2020
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.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

ISAs: your back-to-basics guide for 2018/19

Here’s everything you need to know to make the most of your unused ISA allowance ahead of the 5 April deadli...

A guide to Sharia savings accounts

A number of Sharia savings products have upped their game in recent months, beating more familiar competitors ...

Five ways to get on the property ladder without the Bank of Mum and Dad

A report suggests the Bank of Mum and Dad is running low on funds. Fortunately, there are other options for st...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

Read previous post:
Aviva apologises for calling thousands of customers Michael

Insurer Aviva has been forced to apologise to several thousand customers after mistakenly calling them all Michael.

Close