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Tim Leonard

Tim Leonard

Finance Expert
Published: 18/12/2018

Banks will no longer be able to charge high fees for overdrafts under new plans announced by the financial regulator designed to make overdrafts simpler, fairer, and easier to manage.

As part of its ongoing review into what it has called a "dysfunctional" market, the Financial Conduct Authority (FCA) aims to bring an end to banks charging higher prices for unarranged overdrafts.

Among its proposals, the regulator wants to ban fixed daily or monthly overdraft charges in favour of "a simple, single interest rate".

Arranged overdraft prices will also have to be advertised in a standard way, including an APR to help customers compare them against other products, while banks will also be told to 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.

In 2017, firms made over £2.4bn from overdrafts alone, with around 30% from unarranged overdrafts, according to the regulator. Worryingly, however, more than half of the unarranged overdraft fees collected came from just 1.5% of customers, with people living in deprived areas said to be more likely to be impacted by these fees. In some cases, unarranged overdraft fees have been found to be more than 10 times as high as fees for payday loans.

"Rather than having an array of charges, which can be per transaction, week or month of being overdrawn and a percentage of the amount borrowed, borrowers will have an easier-to-understand interest rate to help them know how much borrowing will actually cost," said Laura Suter, personal finance analyst at AJ Bell.

"Unarranged overdrafts are often too easy for people to fall into, with around 19 million people using them each year, and they can then face charges more than 10 times higher than payday loans. Someone with a £100 unarranged overdraft at the moment can pay £5 a day in charges, and the FCA plans to reduce this to just 20p a day.

"The FCA's moves to cut the costs of unarranged borrowing and for banks to target those who are constantly in their overdraft should be welcomed. The regulator's threat of a future price cap in the sector if banks fail to reform is presumably intended to make banks sit up and take action now, rather than face tougher measures in the future."

With the plans open for discussion until March next year, and final rules not expected to announced until June, anyone paying overdraft fees now should consider switching to a new account if a better, cheaper option is available elsewhere. The bank accounts with overdrafts Best Buys could be a great place to start.

If you're struggling to clear a debt full-stop, then contacting your bank should be your first port of call, but you may want to seek independent support as well. Talking to a debt charity (such as StepChange or Citizens Advice) could be invaluable.

Disclaimer

Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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