City watchdog unveils plans to ease burden on '˜overdraft prisoners'

Overdraft charges will be made simpler and fairer and 'overdraft prisoners' who are persistently in the red will get more help under a radical shake-up proposed by the City regulator.

The FCA plans could be in place by next December.

A fundamental overhaul of overdraft pricing has been suggested by the Financial Conduct Authority (FCA), including ensuring the price for each overdraft will be a simple, single interest rate - with no fixed daily or monthly charges.

It also wants to tackle the highest costs in the market by stopping firms from charging higher prices when customers slip into an unarranged overdraft - when they borrow without arranging this with their lender first.

There would be a ban on fixed fees for borrowing through an overdraft. These fees can quickly ramp up the costs for borrowers and make it hard to compare deals.

Banks will have to do more to identify overdraft prisoners who are persistently in the red and help them sooner.

The proposals, which the FCA described as the biggest intervention in the overdraft market in a generation, could be in force by December 2019.

In some cases, unarranged overdraft fees can be more than ten times as high as fees for payday loans.

Referring to the proposal to align the cost of an unarranged overdraft with that of an arranged overdraft, Christopher Woolard, executive director of strategy and competition at the FCA, said: “The effect of that is if you’ve got a £100 unarranged overdraft at the moment you’re probably paying something like £5 a day for having that £100 overdraft.

“If you take these alignment proposals through, the cost of that drops to about 20p. So it’s a huge difference.”

Mr Woolard said fixed fees of, for example £2, £3 or £5 can sound like small numbers to borrowers.

He continued: “Actually, looked at as an interest rate, that’s huge.”

Around 19 million people use an arranged overdraft each year and around 14 million people use an unarranged overdraft annually.

A significant chunk of the money banks make from overdrafts comes from a small proportion of customers - who are often those who can least afford to pay charges.

In 2017, firms made more than £2.4 billion from overdrafts alone, with nearly a third (30 per cent) of this coming from unarranged overdraft fees and charges.

More than 50 per cent of banks’ unarranged overdraft fees came from just 1.5 per cent of customers in 2016.