Banks asked to explain similar 40% overdraft rates

The Financial Conduct Authority (FCA) has written to the UK’s biggest banks for an explanation about how they decided new overdraft rates.

The regulator is introducing new rules, due to come into effect on 6 April, which aim to get rid of confusing overdraft fees for consumers. Its study into the overdraft market concluded that it was “dysfunctional” with very high charges for unarranged overdrafts.

Banks were ordered to scrap confusing fees and charges and make overdraft costs more transparent.

Aligned overdraft rates

The past few weeks have seen a number of banks and building societies announce their new overdraft rates.

Lloyds, Santander, TSB, Nationwide, Natwest, First Direct and HSBC are all set to bring in a new overdraft rate of 39.9%. Barclays will charge 35%.

But the FCA is concerned that current account providers are all setting very similar prices, so it has written to them to ask for evidence of how they arrived at their pricing decisions.

The letter asks each bank to voluntarily provide a summary of how it calculated its new overdraft rate, the internal and external factors taken into account, and a timeline of key decisions.

Dealing with vulnerable customers

The regulator has also asked banks to provide a summary of their approach to dealing with customers who will be worse off following the pricing changes and the measures in place to support them.

The FCA says it expects banks to take steps to support these customers, for example firms could reduce or waive interest, offer a continuation of overdraft borrowing at current rate of interest, or agree a repayment programme – including a personal loan. 

It says customers who are worried about the impact of any changes should contact their provider. 

Peter Tutton, head of policy at StepChange Debt Charity says: “We welcome this step from the FCA. The new rules on overdraft charges are absolutely necessary to end a longstanding cause of harm to the most financially vulnerable customers. But the FCA now need to be watchful that banks do not perpetuate unfairness or financial harm in another form. It is important that consumers see the new pricing as fair and competitive; and the FCA needs to be sure that the repeat use rules are effective in preventing more people from getting trapped in a cycle of expensive and harmful overdraft debt.”

Myron Jobson, Personal Finance Campaigner, interactive investor, adds: “The FCA’s efforts to make overdraft fees simpler and fairer, while well intentioned, have clearly backfired as many consumers will now face paying interest rates of around 40% if they slip into the red. 

“To put this into context, this is almost double the interest charged on the standard credit card (22.8%, according to the Money Advice Service) and far outstrips the bank’s own cost of borrowing – which is a bitter pill to swallow for customers."