High Cost Credit Review: Overdrafts but not as you know them…

The FCA has published final rules and a further consultation paper setting out reforms to the UK overdraft market alongside its Strategic Review of Retail Business Banking Models.

In May 2018 the FCA clearly indicated its concerns with how the overdraft market currently operates and is now proposing a range of measures which not only will impact the business models of major retail banks but also demonstrate that the FCA will step in to control product charging structures where it thinks there is significant harm to consumers. The FCA has indicated that the new arrangements will be in place by December 2019. Banks have until 18 March 2019 to respond to the new proposals.

The proposals cover 3 key areas:

  • Pricing intervention – the FCA is consulting on proposals to:
    • Ensure only a single interest rate is applied to an arranged overdraft and unarranged overdraft on a current account – different rates can be applied to different current account products but for each account there must be a single rate
    • Require banks to quote a representative APR for arranged overdrafts in financial promotions together with explanatory wording as to why the APR is included – there is also additional guidance on when an account fee should be included in the APR calculation
    • Issue new guidance on the level of fees charged for refused payments which will restrict banks from including costs associated with the general operation of their business when calculating the costs associated with the refusal.
  • Repeat overdraft use – the FCA is also concerned with the level of repeat use by a relatively small number of customers, many of whom it considers to be vulnerable, and is therefore proposing to introduce rules similar to those recently introduced in the credit card sector to deal with persistent debt. Under the proposals banks will need to:
    • Have a strategy to reduce repeat use which must be shared with the FCA and monitored closely
    • Report to the FCA on their monitoring after 6 and 12 months
  • Competition improvements – these implement the proposals consulted on in May 2018 and expand on the remedies already in place following the CMA review into Retail Banking. The FCA is proposing that these final rules will come into force in December 2019 at the same time as the new pricing rules take effect. Banks will be required to:
    • Provide tools to assess eligibility for overdrafts to reduce barriers for consumers who are considering switching and searching for a PCA with an overdraft
    • Include an online calculator so that customers can check the costs of overdrafts against different patterns of use
    • Send text messages or push notifications alerts to address unexpected overdraft use
    • Ensure they do not include any authorised overdraft when displaying the amount of "available funds"

The impact of the competition changes is likely to pale into insignificance when compared to the proposals on pricing intervention and repeat overdraft use. These proposals will require some banks to fundamentally change their overdraft charging models and will potentially lead to the end of "free if in credit" banking – although the FCA believes that the overdraft proposals alone will not lead to this change.

The FCA has also published a consultation paper on introducing new restrictions on Buy Now Pay Later products – this was included with the final rules which apply to home collected credit, store cards and catalogue credit. The restrictions will apply to any credit product with a BNPL offer and will stop lenders back-dating interest on the whole of the original loan if the borrower has repaid part of the capital balance before the end of the BNPL period.

Andrew Bailey has said that the changes are the most significant intervention in the overdraft market for a generation – it is difficult to disagree with that statement.

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