FCA Consultation and Policy Statement on Overdrafts
At the end of last year, the FCA published a consultation paper and policy statement on its proposed reforms to the way banks charge for overdrafts. This forms part of the regulator’s overall review of the consumer credit market; following previous interventions on high-cost short-term credit, rent-to-own and credit cards.
The table below sets out a summary of the FCA’s proposed measures for the overdraft market:
|1.||Alignment of arranged and unarranged overdraft charges - preventing firms charging higher prices
for unarranged overdrafts than arranged overdrafts
|2.||Overdrafts to be subject to a single interest rate only – banning daily or monthly fixed charges|
|3.||Overdrafts to be advertised in a standard way – including an Annual Percentage Rate (APR) to help
customers compare against other products
|4.||Discouraging repeat use - requiring firms to develop a strategy to reduce repeat use of overdrafts|
|5.||Consumer awareness - requiring firms to provide online tools that assess eligibility for overdrafts|
|6.||Consumer engagement - improving the information displayed on overdrafts - requiring an online
calculator so customers can check the costs of overdrafts and help consumers understand how overdrafts work
|7.||Warning of overdraft use - firms to notify consumers via text message warning them of unexpected overdraft use|
|8.||Clarifying the line between credit and consumer funds – ban from including the overdraft amount
in the calculation of “available funds”.
The FCA plans to publish its final rules in early June and intends for the rules to come into force in early December. The rules set out under the policy statement were originally intended to come into force on the 18th December but the FCA is aligning this with the consultation paper proposed implementation date of early December.
52 million people in the UK have a personal current account. The FCA estimates that 36% use an arranged overdraft whilst 26% use an unarranged overdraft each year. The revenue from such overdrafts in 2017 was £2.4bn (30% of which originates from unarranged overdrafts despite unarranged overdrafts only accounting for 4% of all overdraft balances). The FCA is concerned that consumers use overdrafts over prolonged periods and that this form of debt may not be the best form of borrowing for them. The FCA has found that unarranged overdrafts cause financial detriment to vulnerable consumers in particular.
The FCA is concerned about the high charges for overdraft use, the complexity of charging structures, the prolonged and repeated use of overdrafts by consumers and general low consumer awareness and engagement. From its research the FCA has found that 20% of unarranged overdrafts could be avoided using cash or savings and half of all unarranged overdrafts could be avoided using cash, savings or the limit available on existing credit cards or arranged overdraft lines with the same provider. This suggests that consumers currently use overdrafts even though cheaper alternatives are available to them.
The FCA is therefore proposing a number of pricing interventions which it hopes will protect consumers:
- Fees for unarranged overdrafts will be aligned with arranged overdraft fees.
- Clearer pricing structures of overdrafts so consumers can compare with other products such as credit cards or loans.
- Simplification of charges through a single interest rate. All other overdraft fees would be banned (other than fees for refused payments which are permitted under the Payment Services Regulations provided such fees correspond to the costs of refusing payments). Any charges applied in breach of these restrictions would be unenforceable and any consumers charged accordingly would be entitled to reclaim such sums.
- Representative APR as required for other forms of consumer credit will need to be included in certain advertising of arranged overdrafts to help consumers compare the borrowing rates as against credit cards and loan facilities. The APRs will need to be reported to the FCA who may publish this information on its website.
- Ban on tiered pricing so that firms must charge the same interest rate regardless of the amount borrowed (i.e. firms could not offer a certain amount interest-free and then charge a higher rate when the buffer is exceeded).
Despite fears from the industry that prescribing how overdrafts are charged could stifle innovation, restrict competition and the availability of overdrafts, the FCA is pressing ahead with its proposals with the view that they are necessary for consumer protection. Although by reducing the price of unarranged overdraft fees the FCA is aware that this may mean the price of arranged overdraft fees increases, the FCA hopes that the price simplification and disclosure proposals will increase the competitiveness of such fees overall.
Repeat use of overdrafts
To deal with the FCA’s concern with consumers’ repeated use of overdrafts, the FCA is proposing that firms be required to develop a strategy to reduce such repeat use. The strategy will need to be provided to the FCA (and an updated copy would need to be provided following any substantial changes). Firms will need to implement the strategy and monitor its progress, reporting on the outcome after 6 and 12 months respectively.
The consultation paper also incorporates a policy statement for the competition remedy rules for the overdraft market that the FCA consulted on earlier in the year. To increase consumer awareness and engagement around overdrafts, the FCA is requiring firms to provide an online / banking app eligibility tool to indicate whether a consumer is eligible for an overdraft.
Key information about overdrafts will need to be presented clearly and firms will be required to provide an online calculator so consumers can work out the costs of the overdraft.
In addition, consumers should be automatically registered to receive alerts, either by text message or via another channel, warning them of overdraft use that may result in charges.
These requirements only apply to banks with at least 70,000 personal current accounts.
The FCA is also banning the inclusion of an overdraft amount when calculating a consumer’s “available funds”, “balance”, “available balance” or similar to ensure that the consumer understands that an overdraft is a line of credit rather than forming part of the consumer’s own money.
Private Banks excluded?
Private Banks are excluded from the FCA’s proposals; however, it is important to note that the definition of “private bank” may not cover all such firms. The definition requires that half of the bank’s personal current account customers are “eligible individuals” who are individuals who hold assets of not less than £250,000 in the previous 12 months either in cash or in transferable securities (i.e. shares and bonds). This would not include assets held in collective investment schemes for example.
We will be monitoring the FCA’s final rules on overdrafts as well as their potential application to private banks.
If you have any questions on this article or the regulation of overdrafts more generally please contact Vanessa Walters on +44 (0)20 7427 6706 or at Vanessa.Walters@crsblaw.com in our Financial Services Regulatory Team.
Sponsor Licence Compliance: Key considerations & how to be audit ready
Join us for the third in our series of mini webinars on post Brexit immigration about sponsor licence compliance.
UK SPACs: could changes to the UK Listing Rules spark an increase?
SPAC listing popularity has increased. Could the UK be the next hotspot following proposed changes to the Listing Rules?
Sustainable Investing: From ESG Integration to Impact Investing
We have a wide perspective on the range of issues that fall within the spectrum from ESG to impact investing.
Liability for costs of repair (City of London v. Leaseholders of Great Arthur House)
Oliver Park writes an article for Lexis®PSL on a property dispute case.
New tax on property developers - consultation paper published
The government published a consultation paper on the design of the new residential property developers tax.
Procuring modular housing: Is MMC becoming mainstream?
Is Modern Methods of Construction becoming mainstream? Read what it means for Development and Procurement here.
Dual class share structures: how do they work and what are the pros and cons?
Dual class share structures allow a shareholder, for example the founder, to retain voting control over a company.
Q&A: Talking the telecoms talk
Georgina Muskett and Jonathan Wills answer queries on Electronic Communications Code agreement.
Property Patter: Navigating the complexities of Pharmacy Property
Pharmacy property is a specialist area which contains many traps for the unwary.
COVID-19 Vaccination – can an employer make it compulsory for employees?
We review what legal issues to take into account when considering to make vaccination compulsory as an employer.
Linking ESG and Executive Pay
How does a business go about embedding a focus on strong ESG performance into the structures and culture of its organisation?
National Security and Investment Act granted Royal Assent
The Act establishes a new regime for the review of mergers, acquisitions and other transactions that could threaten national security.
Recent Trends In Firewall Legislation: BVI, Bermuda And Gibraltar
Charles Russell Speechlys advises Waverton on acquisition of Cornerstone Asset Management
Established in July 2010 and with offices in Edinburgh and Glasgow, Cornerstone offers wealth management and financial planning advice.
What do the new Debt Respite Scheme Regulations mean for Landlords and Tenants?
This will provide legal protection from creditors in the form of either a breathing space or a mental health crisis moratorium.
Charles Russell Speechlys promotes five to Partner
The promotions are effective 1 May 2021 and are accompanied by one Legal Director and 15 Senior Associate promotions.
Risk allocation in commercial leases: the High Court considers rent suspension, insurance and frustration arguments
Read our summary of the full judgement on the latest Covid arrears case.
Charles Russell Speechlys boosts private wealth offering with the hire of an international tax team
Robert Reymond will be joined at the firm by Leigh Nicoll, Emma Tyrrell and Oliver Cooper.
eprivateclient and Citywealth report on the hire of a new international tax team led by Robert Reymond
The firm strengthened its international wealth structuring capabilities with the hire of an international tax team led by Robert Reymond.
Proposed Takeover Code Amendments – Key Changes
The Consultation Paper has now been followed by a corresponding response paper which made certain modifications to the initial proposals.