High Cost Credit Review: Final rules and guidance on overdraft pricing and repeat use

The FCA has published final rules and a further consultation on a range of measures transforming the overdraft market. The changes in the final rules cover pricing intervention and repeat overdraft use. A new version of the FCA's Payment Services and E-Money Approach Document - containing revised guidance on refused payment fees - has also been published.

The final pricing and repeat use rules are largely unchanged from the proposals consulted on in December 2018 (see our previous blog post). Firms have been given a bit longer to implement the pricing rules changes, which won't now come into force until 6 April 2020, and the repeat use and competition remedies (the latter having been finalised in December 2018) take effect on 18 December 2019. But the FCA's revised guidance on refused payment fees comes in straight away. This means that firms must immediately ensure that such fees reasonably correspond to the costs of refusing payments, so some may already find themselves in breach.

What's changed in the final rules?

Scope

  • Amendment of the definition of private bank which will apply to the new rules on overdraft pricing and repeat use (CONC 5C and 5D) to ensure that it correctly exempts private banks. The new consultation proposals would also amend the definition of private bank in BCOBS 7 and 8 to align with the definition in the new rules.
  • Exclusion of personal currency accounts from the scope of the new pricing rules. The new consultation includes a proposal to also exclude these accounts from the scope of the competition remedy rules.
  • There are no plans to extend the overdraft pricing rules to micro-enterprises, although the FCA makes the point that the refused payment fee guidance does relate to a provision of the Payment Services Regulations 2017 that extends to micro-enterprises. But the FCA will incorporate relevant consultation feedback into its work on SME banking, a follow-up from its Strategic Review of Retail Banking.
  • Similarly, there are no plans to extend the overdraft rules to products marketed as having the same function as an overdraft (eg running account credit), although the FCA will keep them under review.

Pricing intervention

  • The single interest rate for arranged and unarranged overdrafts must be expressed as an annual percentage, rather than the previous proposal to give firms the option of showing a daily, monthly or annual rate. The FCA encourages all firms to show the annual interest rate in the form of an EAR (the industry standard for this type of rate), and to take action to make EAR more familiar to consumers.
  • Extension of the ban on fixed fees to include facility/arrangement fees levied on overdraft facilities of up to £10,000. While not currently common in retail banking, this is an anticipatory change in case firms look to introduce such fees in response to the pricing reforms.
  • The new consultation proposals would require the larger firms which are already required to publish quarterly information about their current account services to add to this by also publishing:
    • the representative APRs they advertise; and
    • the level of arranged and unarranged overdraft interest and refused payment fees charged.

The FCA is proposing that this pricing information should be published for the first time to cover the quarter from 1 April to 30 June 2020. Subject to consultation feedback, this would replace the previous proposal to require annual reporting of representative APR details to the FCA, which has therefore been carved out of the final rules.

  • Firms are encouraged (but not required) to display APR information at other points in the customer journey, eg in statements or internet banking platforms.
  • An industry agreement to introduce a "pounds and pence disclosure", giving consumers a clear example of what an overdraft might cost if they borrowed money across different periods of time, has been developed with UK Finance and will be implemented with the FCA's other pricing remedies.

Repeat overdraft use

  • While the rules remain unchanged in the final version, the FCA has amended its final guidance to:
    • encourage firms to have effective policies, procedures and systems for quickly identifying repeat overdraft users
    • include extra guidance to explain that, before removing an overdraft facility, firms should carefully consider the potential effect on a customer in terms of financial hardship
    • clarify that firms should prioritise more vulnerable customers when implementing repeat use policies and procedures.

Competition remedies

  • The new consultation proposals include minor changes to the rule on alerts auto enrolment to allow firms not to automatically enrol customers who have previously opted out of unarranged or refused payment alerts into arranged overdraft alerts.

What about Brexit?

In the event of a no-deal Brexit, the FCA expects to make provision to ensure that firms that would have been in scope of the new rules before Brexit will still be subject to them afterwards. The FCA would not expect to re-consult on any required updates to its rules or guidance.

What's next?

The closing date for the further consultation is 7 August 2019. Any rule amendments will be published in September 2019.

Following publication of its final rules, the FCA will be engaging with firms to discuss their strategies for addressing repeat overdraft use. It is also planning a post-implementation review of its overdraft remedies package, and will be keeping a particular eye on overdraft pricing, refused payment fees and firms' repeat use strategies. So firms should be prepared for the possibility of more changes ahead.

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