In 2019, the bank regulator, the FCA, announced new rules about overdraft charges. It called these:
the biggest shake-up to the overdraft market for a generation.
Banks had to change their overdraft charging before April 2020. In January 2020, the last of the banks announced how they were changing their rates.
In 2020 the FCA admitted that about 8 million people will be paying more under the new charges, not less. Hardly the big change in favour of consumers the FCA was hoping for.
Who has gained and who has lost?
In general, the gainers from the new charges are:
- people who dip into their overdraft a small amount one or two times a month. They are likely to pay less because the “fixed fee” elements are going.
- people with unauthorised overdrafts. They should see their charges drop a lot, but the banks may be less willing to let them carry on with such large overdrafts.
The losers are likely to be the people who are “repeat users”, spending much of the month in their authorised overdrafts. The higher interest rates for them will add up to more than the small gains from getting rid of the fixed fees.
UPDATE in 2023, the FCA estimated that overall its changes have saved customers about a billion pounds. But although some people have benefited a lot, millions have lost out.
New fees are SIMPLER but often HIGHER for many customers
The new rules mean that banks:
- can’t charge more for an unarranged overdraft than an arranged one;
- can only charge a single interest rate on overdrafts; and
- can’t add a monthly or daily fee for being in your overdraft.
These are all very welcome changes.
With the new simple charging from April 2020, every bank will have to publish the APR on its overdraft. This will make it clear how expensive the overdraft is and also make it easy to see if another bank would be cheaper.
But the FCA didn’t say they had to reduce fees, just simplify them
Banks make huge amounts of money from overdraft fees – £2.4billion in overdraft fees and charges in 2017.
Debt advisers thought the FCA should have forced banks to cut fees by putting a “cap” on what banks can charge, which worked well for payday loans.
But the FCA decided to rely on simpler charges hoping that will make it easier for people to compare what different banks are charging and competition will bring the charges down.
I don’t think that competition will result in banks cutting overdraft charges. People who regularly pay overdraft fees are usually in a difficult financial situation. They aren’t the customers that banks compete hard to get!
How the banks are changing their overdraft charges
Here are the details in order as the banks announced them over a period of several months:
Nationwide – new rate is 39.9%
Nationwide was the first bank to bring in the new charges:
- bringing in a single overdraft rate of 39.9% for its accounts with overdrafts (FlexDirect, FlexPlus and FlexAccount)
- scrap all unauthorised borrowing charges and paid and unpaid transaction fees
- remove the £250 fee-free buffer offered on FlexPlus authorised overdrafts.
The FlexAccount currently has a 18.9% charge for authorised overdrafts, so all customers who used an authorised overdraft will be paying double under the new charges.
A Nationwide spokesperson said: “A third of our overdraft borrowers will pay less or the same.” Of those that will pay more, 75% will pay a maximum of 20p a day more than they currently pay.
Nationwide has a calculator where you can compare what you are were charged to what the new rates wil be if you can summarise how much your overdraft is used, eg “£200 for 8 days a month”.
HSBC & First Direct – also 39.9%
- removing the £5 daily usage fee for unarranged overdrafts
- charging 39.9% interest on arranged or unarranged overdraft
- reducing the monthly maximum charge for using an unarranged overdraft to £20.
HSBC has been charging 9.9%-19.9%, so this is a very large increase for people who use their overdraft a lot. First Direct has announced the same charges as HSBC, its parent bank.
M&S – another at 39.9%
M&S has announced its new charging. from 14 March – it’s a flat fee of 39.9%.
But they are increasing the fee-free amount to £250 from £100, so that will help people who don’t use a lot of their overdraft.
Starling and Monzo – charging more for people with a poor credit score
The two new challenger banks have taken a different approach. Monzo will be charging 19%, 29% or 39% depending on your credit score. Starling will be charging a bit less at 15%, 25% and 35%.
RBS and NatWest – guess what, 39.9%
RBS and NatWest (part of the same group) are making a raft of changes to their various types of account:
- scrapping the flat fees for arranged overdrafts (£6 a month) and for unarranged overdrafts (£8 per day),
- scrapping the fee-free buffers (except for their Graduate accounts), and
- increasing the interest rate on arranged and unarranged overdrafts to c.39.5% on most accounts, except for Premier Select And Reward Black accounts which be charged c. 19.5%.
The losers will be the heavier overdraft users, who will pay a lot more in interest and not benefit much from not paying the flat fees, and infrequent users who always stayed within the fee-free buffer.
Barclays – only 35%!
Barclays is replacing its current tiered daily charges (75p per day for overdrafts up to £1,000; £1.50 per day for overdrafts of £1,000 – £2,000; and £3 per day for overdrafts over £2,000. ) with a single interest rate of 35%.
Santander – another at 39.9%
Santander is replacing all its current different sorts of charges with a single rate of 39.9% on arranged and unarranged overdrafts. It says “Anyone using an arranged overdraft of less than £1,065 will pay less than they do today.”
TSB – surprise, surprise it’s 39.9%
It’s scrapping its current complex web of charges and says the new 39.9% rate will be cheaper for about 70% of its customers. But that means it’s going to be more for 3 out of 10, so if you are one of them, this could prove expensive for you.
Lloyds & Halifax – most 39.9% but some will pay 49.9%
Lloyds & Halifax previously had very high charges and say “As a result of these changes, 90% of customers with an overdraft will pay less than they do today. ”
Most people will pay 39.9% or, if they are Club Lloyds customers, 27.9%. But some people will pay a high 49.9% because of their credit score or the way they have operated their account – which sounds a bit vague.
Lloyds says you will be told in advance if your rates is going up – but this feels to me like hitting customers who are in financial difficulty. And what if your credit score has been ruined by something you knew nothing about?
Competition, what competition?
I was sceptical that banks would rush to have lower charges than the other banks.
And there hasn’t been much sign of it in practice… almost all rates are in the 35-40% area.
Now a firm can’t just decide to charge the same as another firm – that would be against competition policy in the UK. But at first sight that looks like what has happened.
Your options with higher fees if you can’t clear the overdraft
You can’t rely on your bank stepping in and helping you at some point. If your charges are going up, I think you should look at what you can do now to improve your situation
Overdrafts are a very hard type of debt to get rid of. Unlike a credit card, which you can stop using, the fact you have credits and debits arriving all the time can make it hard to reduce overdraft usage by a bit each month.
For many people with a poor credit record and a large overdraft, one practical way forward is to get a new basic bank account, switch to that for your main banking and just see your old bank account as a debt to be repaid.
But if your bank has given you a credit limit that is so large you can’t clear it,the high charges make this even worse. If this trap has been going on for over a year,you may be able to win an affordability complaint – this can get you a refund of fees and interest charges .
See Problem overdraft? How to ask your bank for a refund of interest which explains more about the reasons to complain and has a template letter you can use. Banks may reject good cases, but it’s easy to send a case to the Financial Ombudsman where a lot of overdraft affordability complaints are being won.