In the UK, 52 million people have a personal current account, with an estimated 37% using an arranged overdraft while a quarter use an unarranged overdraft each year.

In 2016, firms made an estimated £2.3bn in revenues from overdrafts, with around 30% coming from unarranged overdrafts.

The issues identified by the Financial Conduct Authority (FCA) are the high levels of unarranged overdraft fees compared to the amount borrowed and the fact that overdraft charges are ‘highly concentrated’. A minority of consumers (1.5%) pay the majority of fees (around £450 a year), with the distribution ‘appearing potentially harmful’.

As such, the FCA is consulting on the following reforms:

• mobile alerts warning of potential overdraft charges
• stopping the inclusion of overdrafts in the term ‘available funds’
• requiring online tools to make the cost of overdrafts clearer
• introducing online tools to assess eligibility for overdrafts
• making it clear overdrafts are credit or borrowing.

These proposals could save consumers £140m a year. But the regulator added it may also consider more radical options such as banning fixed fees and ending the distinctions around unarranged overdraft prices.

Rent-to-own reforms

Rent-to-own allows consumers to buy household goods, such as washing machines and televisions, through weekly instalments.

The FCA said the costs for the 400,000 customers can be high and in some cases, exceptionally high as it saw one case where a consumer paid over £1,500 for an electric cooker which could have been bought for less than £300.

As such, it is considering a cap on rent-to-own prices, similar to the cap introduced in the payday loan market. Further, it’s also consulting on whether to ban the sale of extended warranties at the point of sale, helping to save consumers nearly £8m a year.

Home collected credit, catalogue credit and store cards

The FCA is looking to raise the standards in disclosure and sales practices to prevent home-collected credit firms (doorstep lenders) from offering new loans or refinancing during home visits without the customers specifically requesting this.

It added that these measures are estimated to save consumers up to £34m a year.

Turning to catalogue credit and store cards, the FCA found consumers aren’t always aware that interest is charged from the date of purchase and they’re not given sufficient choice and control over credit limit increases.

As such, it wants to see these firms provide clearer explanations of the impact of costs, more information on when customers can be offered credit limit increases and when they can decline such offers, as well as offer additional help to those in persistent debt. These changes are estimated they will save consumers up to £27.5m a year.

Joanna Elson OBE, chief executive of the Money Advice Trust, said the FCA’s decision to introduce a cap in the rent-to-own market is welcome – and could make a significant difference to thousands of people.

“The regulator should keep the impact of its new measures in other sectors, such as doorstep lending, under review – and be prepared to reconsider the case for further cost caps.

“Similarly, while new measures on unarranged overdrafts may go some way in addressing the problems we help people with at National Debtline – the FCA should still be prepared to intervene with its ‘backstop price cap’ if consumer detriment persists in this area. It is important that this option remains firmly on the table.”