Banks will no longer be allowed to charge daily or monthly overdraft fees from April 2020, as the UK’s financial watchdog confirms rules that clamp down on excessive charges.
Banking industry regulator the Financial Conduct Authority (FCA) confirmed today that rules restricting overdraft fees will come into force next April. Excessive day-by-day charges will be banned, and you’ll no longer pay more for an unarranged overdraft.
Which? has campaigned for an end to unarranged overdraft fees for years, calling for them to cost the same as arranged overdrafts.
Banks now have just under a year to comply with the FCA’s ruling, but are obliged to make changes as soon as possible.
Find out how you’ll be affected under the new rules, and how much your bank is allowed to charge.
The real cost of unarranged overdrafts
Banks made £2.4bn from overdrafts alone in 2017, with £0.7bn of that coming from unarranged overdrafts – meaning spending beyond your agreed limit.
Worryingly, 50% of all unarranged overdraft charges came from just 1.5% of customers in 2016. And 14% of consumers used their overdrafts every month, paying 69% of all arranged and unarranged overdraft fees.
People are more likely to incur these fees if they live in deprived areas, the FCA found.
This suggests a vulnerable group of consumers are trapped in a cycle of overdraft debt, racking up huge amounts as the months go by with little prospect of paying it back.
Indeed, the FCA found unarranged overdraft fees regularly exceeded 10% per day. In some cases, the fees were more than 10 times as high as payday loans.
- Join the Conversation: the FCA explains why it’s tackling overdraft fees
What will the new rules change?
The FCA is bringing in a number of new rules to change the way overdraft fees are charged, and making their costs easier to understand.
Under the new rules, banks and building societies will have to:
- charge the same for arranged and unarranged overdrafts
- stop charging monthly or daily overdraft fees
- price overdrafts by a simple annual interest rate
- advertise arranged overdraft prices with an APR to help customers compare them to other products
- charge fees for refused payments that are more in line with the cost to the bank
- identify customers who show signs of financial strain and help them reduce their overdraft use.
UK Finance has also agreed with the FCA that banks will have to set out the cost of borrowing in pounds and pence, alongside an interest rate and APR. This will help customers see more clearly what borrowing from their overdraft will cost.
When these new rules come into place, the typical cost of borrowing £100 through an unarranged overdraft will drop from £5 a day to 20p a day, according to FCA estimates.
Gareth Shaw, head of money at Which?, said: ‘Which? has campaigned for years for an end to these rip-off unarranged overdraft fees, some of which were found to be drastically more expensive than a payday loan.
‘This strong action from the regulator will come as a huge relief to those people who’ve been regularly hit with such extortionate charges. The changes can’t come soon enough.’
Which banks will have to make the most changes?
Currently, banks and building societies take a number of different approaches to charging overdraft fees.
Some have already moved to increase the fairness of their pricing models, but others have a way to go.
In January last year, Santander scrapped unarranged overdraft fees on its premium accounts. Customers with free accounts, however, are still charged daily fees for being overdrawn.
Barclays, Lloyds, Monzo, and Nationwide all charge fixed daily or monthly fees for arranged overdrafts, too.
Which? research from May 2019 compared the costs of overdrafts from all the major providers.
The most expensive current account for being overdrawn is NatWest’s Select and Reward account. Borrowing £500 for a week would cost £7.74.
With First Direct’s 1st Account – the best current account for being overdrawn – the same spending would cost a tenth of that, at just 71p.
You can see how your bank compares in our guide to the best banks for arranged overdrafts.
When it comes to unarranged overdrafts, Lloyds, M&S Bank and Starling Bank all have no additional fees. Many other banks do, however.
TSB has the most expensive bank accounts for unarranged overdrafts – borrowing £100 over a week would cost a staggering £76.35.
You can find out the best – and worst – providers in our guide to unarranged overdrafts.