• The FCA has written to banks asking how they decided upon huge increases in arranged overdraft charges (https://www.fca.org.uk/publication/correspondence/overdraft-pricing-letter-firms.pdf)
• Many of the UK’s biggest lenders will charge customers 40% a year ahead of the reforms coming into force in April
• This regulator is banning banks from charging daily and fixed fees on overdrafts, and preventing firms charging different rates on arranged and unarranged borrowing
• FCA says 70% of people will be better-off as a result of the changes, meaning 30% will be worse-off
Tom Selby, senior analyst at AJ Bell, comments:
“The FCA is clearly concerned at the significant negative impact its overhaul of lending rules will have on those with large arranged overdraft balances.
“While the intention of the reforms was to help those hit with eye-watering daily charges on unarranged overdrafts – a substantial proportion of whom tend to be people from deprived areas – there has been something of a waterbed effect. In the process of pushing down on unarranged fees, the costs faced by those in arranged overdrafts are set to balloon.
“Millions of people in arranged overdrafts are now worried about their borrowing costs doubling overnight, potentially pushing many into a difficult financial position. The FCA has clearly been jarred by the reaction of the market and is now leaning on firms to help customers affected by the imminent rise in costs.
“We will have to see whether banks react to this increased regulatory scrutiny. However, in the meantime borrowers should take action today to ensure they mitigate any negative impact on their finances.”
What can people affected by arranged overdraft rate hikes do?
1. Make sure you’re on the best deal possible and speak to your bank. While arranged overdraft rates are increasing across the market, there are still differences and so it’s worth shopping around and switching to get the best rate available. You should also have a chat with your current lender to see if they can help.
2. Make the most of interest-free facilities available. There are still accounts offering an interest-free overdraft of up to £250, so if you have no such facility you should seriously consider switching. At an interest rate of 40%, this would save you around £100 a year.
3. Consider a 0% credit card (if possible). With many banks moving to 40%+ overdraft charges, this kind of borrowing now very much shifts into the ‘high-cost’ category. If you can, consider opening a credit card with a 0% interest rate and transferring the balance over – this will give you some breathing space to pay off the debt before charges kick-in. However, make sure you do this with a plan in place as the credit card company will eventually start hitting you with significant interest charges too.
4. Don’t stick your head in the sand! Often debt sparks a fearful response, with people preferring to ignore it and hope for the best rather than deal with it head on. So start off by looking at your balance and working out a sensible time period over which you can try to pay it off, including writing down a reasonable monthly budget. You should then keep a regular eye on your finances to ensure you remain on track.
