Ban on overdrafts being included in ‘available funds’
New rules implemented today by the financial watchdog mean overdrafts can no longer form part of a customer’s ‘available funds’.
The rules form part of a complete overhaul of the ‘dysfunctional’ overdraft market which saw lenders rake in £2.4bn in 2017, of which a third came from unarranged overdraft fees and charges.
The Financial Conduct Authority (FCA) wants to make it clear that overdrafts are credit or borrowing and the rules that come in today are designed to make overdrafts easier to manage.
Banks and building societies will also need to send text alerts for unexpected overdraft use and provide digital eligibility tools allowing customers to check if they can get a cheaper overdraft with another provider. They’ll also need to provide overdraft charge calculators so users can see how much they’ll pay in pounds and pence.
In April 2020, new pricing rules will also be introduced. Banks and building societies will need to price overdrafts by a simple annual interest rate and must advertise arranged overdraft prices with an APR to help customers compare them against other products.
They’ll also no longer be able to charge customers higher prices for unarranged overdrafts than arranged overdrafts.
The FCA will also ban fixed daily or monthly charges, and fees for having an overdraft facility.
It said given all the changes, the typical cost of borrowing £100 through an unarranged overdraft will drop from £5 a day to less than 20p a day and believes customers will save up to £140m a year.
However, the move has resulted in a number of lenders hiking their overdraft fees as they look to align arranged and unarranged charges. Monzo and Starling were the latest to hike overdraft fees, following on from Nationwide, HSBC, First Direct and M&S.