UK banks told to explain 40% overdraft rates

Britain’s financial watchdog is demanding that major banks explain why they have set virtually identical overdraft rates of 40% in response to new rules.

The Financial Conduct Authority has banned excessive and confusing overdraft fees, after its investigation concluded the overdraft market was dysfunctional and caused “significant harm” to the most vulnerable customers. It found high street banks charged fees for unarranged overdrafts that were 10 times the cost of a payday loan.

The FCA said its reforms had ended high unarranged charges, saving typical borrowers up to £55 a month on an unarranged overdraft of £100 over seven days.

Banks have also been asked to come up with a strategy to reduce repeat use of overdrafts, and to report on its effectiveness after six and 12 months. More than half of banks’ unarranged overdraft fees came from only 1.5% of customers in 2016.

However, as lenders overhauled their overdraft costs in response to the new rules, most have set similar prices, of about 40%, the watchdog said, prompting it to write to major banks to request evidence of how they have arrived at their pricing decisions.

“We will be keeping a close eye on the market and we will act should we see continued harm,” the FCA said.

Under the new pricing rules, which take effect in April, banks can no longer charge higher prices for unauthorised overdrafts than for authorised ones, and have to price overdrafts using a simple annual interest rate.

Nationwide introduced a single 39.9% rate in response, and others have announced the same rate, including HSBC and Santander. At Lloyds Banking Group, which owns Halifax and Bank of Scotland, the majority of customers will pay a rate of 39.9% although for some it can be as high as 49.9%.

The FCA stressed that it expected firms to take positive steps to help customers who may be worse off or in financial difficulties as a result of these changes. It has asked to see their plans for how they are dealing with the most affected customers, and advised people who are worried about the changes to contact their lender.

The watchdog suggested firms could reduce or waive interest, offer a continuation of overdraft borrowing at the current rate of interest, or agree a repayment programme for example through a personal loan.

The debt charity StepChange welcomed the latest step from the FCA. Peter Tutton, head of policy, said: “The new rules on overdraft charges are absolutely necessary to end a longstanding cause of harm to the most financially vulnerable customers. But the FCA now need to be watchful that banks do not perpetuate unfairness or financial harm in another form.”