Bank fees are too expensive, unfair and aren’t transparent at all. We know that’s not news to you, but the industry regulator, the Financial Conduct Authority (or FCA), has investigated UK overdraft fees and has just published a consultation and policy paper (High-Cost Credit Review) with their findings and new proposed rules to help consumers more easily understand their fees.
High overdraft fees: the context behind the consultation
The FCA believes that one of the main causes of harm being brought to consumers – particularly to vulnerable consumers – is from the disproportionately high cost of overdrafts.
They found that more than 50% of financial firms’ unarranged overdraft fees came from just 1.5% of customers in 2016. Alarmingly, in some cases unarranged overdraft fees can be more than 10X as high as fees for payday loans. They propose changing the way banks charge for overdrafts, including tackling high charges for unarranged overdrafts.
Addressing the four key drivers of high cost
But it’s not as simple as cutting overdraft fees or creating an across the board price cap on fees (which could actually drive up the cost of lower price options). They appear to want to address the key drivers that work together to make overdrafts expensive. Here is a look at the key areas they want to address, how they propose addressing them and what it means for you.
1. Complex pricing structures
The current pricing structure for overdrafts is confusing, and because it’s so confusing and unstandardised it can mean that consumers aren’t aware of what they’re getting into and pay more.
To rectify this, the FCA proposes eliminating fixed (daily) fees for borrowing through an overdraft that many high street banks charge. This is because it can amount to paying more than a percentage interest rate. Instead, they suggest using and referring to the more standardised Annual Percentage Rate (APR) representation. This will make it easier for you to more fairly compare total overdraft costs against other products like credit cards or loans.
2. High level of fees
If you take out an unarranged overdraft you will likely pay much more than you would with an arranged overdraft, despite it not costing much more for the bank to provide an unarranged overdraft to you. It’s disproportionate and unfair, so the FCA suggests aligning the costs of these two products. This likely means paying less for an unarranged overdraft in the future.
3. Repeat use
This is an interesting area that impacts cost because if overdrafts are too inexpensive it could lead to regular repeat use and even overuse; but being too expensive can put consumers who need the facility in financial difficulty, particularly if they have to keep dipping into their overdrafts.
The FCA proposes that banks do more to identify overdraft customers who are showing signs of financial strain or are in financial difficulty, and to help them to reduce their overdraft use. This means monitoring and setting up triggers in customers accounts to help them engage with them early to prevent financial distress. This could make you feel a bit uncomfortable, but it looks like it could be a positive step for banks to work alongside the best interests of their customers by getting a full picture of their financial situation and supporting them through their repayment and financial success.
4. Lack of engagement and awareness
Arguably the biggest issue we’ve found with consumers is their understanding of overdrafts. These products seem to have been designed to confuse us all.
One thing cited in the paper as being a bit sneaky is that many banks tend to include the money you have earned in your account alongside your available overdraft in your “available balance” display in your account. The FCA wants to eliminate this way of displaying your “available balance”, so don’t be alarmed if you see your available balance dramatically fall in the coming months.
The paper suggests that firms create online tools and calculators to help you understand how your bank calculated a given (overdraft) fee, which should help you more easily understand what is involved and evaluate it over other products.
They also suggest creating alerts customers who enter into overdraft. This is a big, positive suggestion, as the research shows that around 20% of unarranged overdrafts could be avoided using either cash or savings (by transferring money between your accounts).
This is all good news, right?
Addressing the key drivers that influence high-cost credit is important, but it may also mean that there are unintended consequences to be aware of.
Banks made roughly £2.4 billion in revenue from overdrafts in 2017. That’s an incredible amount of their bottom line that they may need to reduce if all of the FCA proposals are enforced. My assumption is that the banks will charge in other areas of your current account to recover these potential losses. Products this may impact include:
1. Refused payment charges (these currently range between £5-£25 per refused payment)
2. Foreign currency exchange charges
3. Creating or increasing Account Usage fees and Maintenance fees
A second area which might cause a bigger impact is banks discontinuing unarranged overdrafts entirely. This would likely result from there being so many rules and caps that the banks would just rather stop offering them, instead leaving consumers to price-capped payday loans for their short-term lending needs. The high-cost, short-term loans market is significantly smaller than the current accounts market (52 million customers) of which 70% used overdrafts; so the impact of cutting out any portion of this customer base from access to credit could be disastrous.
Fairer, clearer solutions
We are delighted that the FCA is looking into, and requesting input on, the high-cost of overdrafts in the UK. This consultation and policy paper is a big step in the right direction.
We’re delighted that much of what Trezeo is addressing with our running account income smoothing, transparent and affordable credit, and innovative savings tools were recognised as alternatives to costly, opaque overdrafts. We are reassured that the clever consultants and FCA research team are actively looking for solutions to such a big issue for UK consumers.