The Financial Conduct Authority (FCA) is tackling what it describes as a “dysfunctional” overdraft market with a raft of measures that are designed to stop banks from taking advantage of customers who resort to using their overdrafts.

Under the new rules, which are set to come into force in April 2020, banks and building societies will no longer be able to charge customers higher prices for unarranged overdrafts in comparison to arranged overdrafts.

The FCA will also ban fixed daily or monthly charges, and fees for having an overdraft facility.

By simplifying and standardising the way banks charge for overdrafts, it should result in the typical cost of borrowing £100 through an unarranged overdraft to drop from £5 a day to less than 20 pence a day.

Making comparisons easier

The City watchdog will require banks and building societies to price overdrafts using a simple annual interest rate. When overdraft prices are advertised they will need to include an annual percentage rate (APR) to help customers to compare them against other products.

Research carried out by the FCA also showed that consumers would like to see the cost of borrowing set out in pounds and pence – something that UK Finance, a trade association for UK banking, has agreed to implement.

The FCA’s changes will require banks and building societies to do more to identify customers who are showing signs of financial strain or are in financial difficulty, and develop and implement a strategy to reduce repeat overdraft use.

Andrew Bailey, chief executive of the FCA, said: “The overdraft market is dysfunctional, causing significant consumer harm. Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, which are often ten times as high as fees for payday loans.”

He added that the FCA’s “radical package of remedies” will make overdrafts fairer, simpler and easier to manage.

Reforms “long overdue”

Emma Craig, money spokesperson at comparison site MoneySuperMarket, welcomed the reforms and said they were “long overdue”.

“It’s important to note that consumers won’t see any of these changes until April 2020, so if you’re stuck in your overdraft, you need to take matters into your own hands. There are plenty of options available to manage the debt, including switching your current account or moving the overdraft balance to a 0% credit or money transfer card,” she added.

Rachel Springall, finance expert at comparison site Moneyfacts, commented: “Over the next few weeks we would expect a few big names to respond to these measures, and when they do, it is highly likely that others will follow suit.

“Banking customers will benefit from a ban on fees, but it’s unknown at this stage whether banks will amend other features of an account to make up for the loss in overdraft charges, and that could mean bad news for consumers overall.”