Recently we’ve seen a great series of wins for consumer rights in banking. Customers have benefited from a range of changes such as better fraud repayment schemes and more ways to manage their money thanks to open banking. Now there’s another development – and we think that this might be one of the most helpful yet, since it tackles something that applies to a significant number of people: overdrafts.
As of April 2020, there are going to be some significant changes to the way that banks can charge their members for going overdrawn. Here’s what you need to know about the new rules:
- Banks will have to charge a single interest rate for going overdrawn, rather than a fixed daily or monthly cost. This is important because daily rates in particular can mount up very quickly, penalising people for dipping into their overdraft even if they only borrow a small amount of money.
- They will no longer be allowed to charge different amounts for unarranged vs. arranged overdrafts.
- Banks won’t be able to charge customers simply for having an overdraft available to them.
Banks are also being asked to do more to help customers avoid getting into problems with their overdrafts. They’ll be expected to identify customers who appear at risk of facing financial difficulty and offer help and advice. These changes are expected to benefit the 14million people who currently use an unarranged overdraft every year.
It’s less clear what the impact will be for people who use arranged overdrafts, though. There are some worries that banks may put the costs of these up to allow them to continue charging high interest rates for unarranged borrowing. This could mean that, while better for consumers as a whole, the new regulations will be disappointing to some people who currently rely on the lower fees associated with having an overdraft arranged in advance.
It’s also worth noting that there’s no plan to put a cap on the amount that banks can charge. So, while they’ll have to replace fixed daily or monthly fees with an interest rate, that interest rate can be set as high as they like. This means that it will be more important than ever to check how much you’re going to be charged and shop around for a bank account offering low fees. Part of the new regulations specifies that banks will need to clearly advertise the interest rate for any overdraft, and that will make it a lot easier to compare products.
Charities and organisations such as Citizens Advice are cautiously optimistic, welcoming the changes but suggesting that we still may need to go further. Their chief executive Gillian Guy said:
“Overdraft charges can have serious knock-on effects for people’s debt and mental health. These new rules should help thousands of people from getting trapped in a debt spiral,” she said.
“If, after these measures are introduced, people still pay over the odds, the FCA should review the need for an interest rate cap to ensure no one is paying back more than twice what they borrowed.”
Overall, this is a welcome step forward – and it will be great to see how fairer overdraft fees can really help people who often run out of money before payday.