Falling into an unplanned overdraft can be a costly mistake, with sky-high fees and additional charges making it something that can be difficult to recover from. Which is why it's such welcome news that the Financial Conduct Authority (FCA), the UK's financial watchdog, is proposing changes to such fees, which could benefit huge numbers of consumers.
In its review of the high-cost credit sector – which includes overdrafts as well as things like payday loans and catalogue credit – the FCA established clear concerns, and as such believes that "fundamental changes in the way that unarranged overdrafts are provided may be necessary".
After all, as the regulator points out, charges for unarranged overdrafts are often incredibly high, as well as being complex to customers, which is why it's calling for action. This means there could be changes to how customers who go unexpectedly into the red are charged, and although there's as yet no direct plan for fixing this kind of issue – the FCA says that it's "developing tailored solutions" and will consult on the action to be taken next year – it certainly sounds like we're on the right lines.
"High-cost credit products remain a key focus for us because of the risks they pose to potentially vulnerable customers," said Andrew Bailey, chief executive of the FCA. "The nature and extent of the problems that we have found with unarranged overdrafts mean that maintaining the status quo is not an option.
"We are now working to resolve these issues while preserving the parts of the market that consumers find useful."
While nothing has been set in stone just yet, it seems that some banks are already making changes to their policies, and are even going further than many expected – Lloyds Bank recently announced that it was abolishing all unarranged overdraft fees and charges for its current account customers, as well as simplifying the fee structure of arranged overdrafts.
The changes will certainly be beneficial. From November 2017, all fees and charges associated with unplanned overdrafts will be removed completely, including fees for missed payments, which means no-one will be charged a return fee for having payments stopped.
It's also implementing a simple charging system for planned overdrafts: from November, customers will be charged a single rate of 1p per day for every £7 of planned overdraft usage, with the fee added at the end of each day, rather than a cumulative fee being charged weeks later. Again, unpaid item fees are being removed.
"This new approach is simple and clear, giving customers more control of their overdraft borrowing and how they manage their finances," said Vim Maru at Lloyds Banking Group, and it could have considerable benefit. The bank expects that more than nine in 10 of its customers – including customers of Lloyds Bank, Bank of Scotland and Halifax – will either be better off or unaffected by the changes, and the savings could be marked.
Lloyds calculates that, when the changes come into effect, a customer who goes overdrawn by £100 within their planned limit for 10 days will pay £1.40, compared with the previous charge of £6.38. If they then went into an unplanned overdraft of £50, they wouldn't be hit with any additional fees, so they'll still be charged £1.40 – even if a payment bounces back – rather than the £18 they would have been charged under the old system.
Lloyds says that it'll write to all customers in the coming weeks to explain the changes, so there shouldn't be anything for customers to do but enjoy the future changes. Time will tell whether other providers will follow suit, particularly in light of the latest update from the FCA, but in the meantime you may want to start considering your options.
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