HSBC, First Direct and M&S Bank will hike interest rates to 39.9% EAR for arranged and unarranged overdrafts from March 2020.
The banks have moved to simplify their fee structure in order to comply with the Financial Conduct Authority’s (FCA’s) upcoming ban on unarranged overdraft fees and daily/monthly charges.
In November, Nationwide became the first lender to adjust its overdraft charges in line with the new rules. It also hiked the rate across its accounts to a simple 39.9% EAR.
Here, Which? explains what’s changing for HSBC, First Direct and M&S Bank overdraft charges on each account and what it might mean for your money.
How are HSBC, First Direct and M&S Bank’s overdrafts changing?
From 14 March 2020, you’ll be charged a simple flat fee of 39.9% EAR variable whether you have an arranged or unarranged overdraft.
When you get charged this amount will depend on the fee-free buffer you have associated with the account.
M&S Bank is increasing the fee-free arranged overdraft limit from £100 to £250; First Direct is keeping its £250-fee-free limit for arranged overdrafts, while HSBC is upping its fee-free limit for most accounts to £25.
For HSBC and First Direct customers, the monthly maximum charge (MMC) for using an unarranged overdraft will be capped at £20. M&S customers will no longer be able to use an unarranged overdraft.
The table below shows how fees are changing across HSBC and its other brands First Direct and M&S Bank. You can use the tabs to switch between brands to find out what’s happening to your account.
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What do the changes mean for you?
The HSBC, First Direct and M&S Bank changes will impact you if you are one of their customers and you use or are likely to use an arranged or unarranged overdraft.
HSBC says for seven in 10 customers who use an overdraft it will be cheaper or cost the same under the new pricing plan.
For example, a customer who is overdrawn by £200 in an unarranged overdraft for 15 days would be charged £2.78 under the new payment structure, compared with £80 under the old structure.
However, an HSBC Advance customer will see their interest jump from 17.9% to 39.9% EAR on arranged borrowing.
This means borrowing £200 over 30 days would cost £5.74 with the new rate compared to £2.95 under the old plan, according to our calculations.
HSBC is introducing a £25 fee-free buffer to soften the blow for Bank Account and Advance customers.
Jade customers will see their fee-free buffer increase from £500 to £1,000 from 14 March 2020 and unarranged fees will be capped at £20 compared to £2,000 previously. Premium customers won’t see a change to their fee-free buffer of £500 and unarranged fees will be capped at £20 rather than £500.
First direct customers that have a £250 fee-free overdraft won’t be affected unless they go over that amount, and interest will soar from 15.9% to 39.9% EAR.
By our calculations borrowing £500 (£250 over the fee-free amount) with an arranged overdraft for 30 days would cost £8.19 with the new rate compared with £3.27 under the current rate.
Which? Money asked First Direct to reveal the proportion of borrowers that would pay more under the rules, but as yet we have yet to receive a response.
For M&S Bank current account holders the new pricing plan will mean interest on arranged and unarranged borrowing will also soar from 15.9% to 39.9% EAR.
However, the bank is raising the interest-free buffer from £100 to £250, which it says will mean ‘most overdraft users will be in a better position’.
By our calculations borrowing £500 (£350 over the fee-free amount under old rules; £250 over the fee-free amount under new rules) with an arranged overdraft for 30 days would cost £11.48 with the new rate compared with £3.27 under the current rate.
The bank will also change how it sets overdraft limits to new customers. Instead of an automatic £500, the bank will allow customers to apply for an amount that meets their needs.
- Find out more: best banks for arranged overdrafts
Why are HSBC, First Direct and M&S Bank changing overdraft fees?
Back in June, the FCA confirmed that new rules on overdraft fees would be enforced from next April.
The announcement came after years of campaigning from Which? urging the regulator to take action on excessive charges.
Under the rules, banks and building societies will no longer be able to charge more for unarranged overdrafts, and daily overdraft charges will be banned.
Banks will also have to provide annual percentage rates (APRs) for their overdrafts, as they do with loans, to make them easier to compare.
All banks and building societies will need to be compliant by April 2020.
- Find out more: banks banned from charging extortionate overdraft fees
Will other banks increase overdraft fees?
It’s likely that other banks will follow Nationwide, HSBC, First Direct and M&S Bank as the FCA’s deadline draws closer.
Overdrafts make banks a lot of money. Firms made £2.4bn from overdrafts alone in 2017 – 30% of which came from unarranged overdrafts, according to an FCA report.
Once the ban on unarranged overdraft fees comes into force, banks may want to make up the lost revenue by tinkering with the interest rates on arranged overdrafts.
Indeed, the FCA anticipated this behaviour from banks but concluded that customers would still be better off.
Which? will keep you informed and report on any further changes to overdraft charges over the coming months.
In the meantime, you can take a look at the bank accounts that offer the best unarranged overdrafts to ensure you are getting a good deal on your borrowing.
- Find out more: best banks for unarranged overdrafts