In June 2019, the bank regulator, the FCA, announced its new rules about overdraft charges. It called these:
the biggest shake-up to the overdraft market for a generation.
Banks have to change their overdraft charging before April 2020.
On 22nd January the last of the banks announced how they were changing their rates. And the FCA has now 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.
Are you going to be one of the 8 million set to pay more? Or will you gain from these new rates?
New fees have to be SIMPLER
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.
Until now it has been hard to work out how much your monthly overdraft fee will be. And impossible to compare one bank’s charges with a different bank.
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 SIMPLER often isn’t LOWER
Banks made £2.4billion in overdraft fees and charges in 2017.
The FCA hasn’t said that banks have to cut overdraft charges, just simplify them.
So there is nothing to stop the banks increasing authorised overdraft charges to make up for getting less on unauthorised overdrafts. And where a bank is changing from complex tiered charges and fixed fees to a single interest rate, some people end up paying more and others may pay less.
Debt advisers had suggested the FCA should put a “cap” on what banks can charge, which worked well for payday loans.
But the FCA decided to rely on simpler charges making it easier for people to compare what different banks are charging and competion will bring the charges down.
I am sceptical. It will be good to be able to compare overdraft charges easily but I don’t think this will lead to tens of thousands of people changing banks.
And 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!
The gainers will be:
- 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.
- peopler with unauthorised overdrafts 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 APRs for them will add up to more than the small gains from getting rid of the fixed fees.
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 just 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% – wait, what?
Your options if your fees are going up
Overdrafts are a very hard type of debt to get rid of. Unlike a credit card, which you can just cut up and concentrate on paying off, the fact you have credits and debits arriving can make it hard to reduce the overdraft usage by a bit each month.
For many people with a poor credit record and a large overdraft, a good way forward is to get a new basic bank account, switch to that for you main banking and just see your old bank account as a debt to be repaid. You could also ask the old bank if it can offer you a cheaper way to clear this old balance – with the new rules coming in, banks may be more prepared to do this.
Banks also have to do more to reduce “repeat overdraft use”
Having an overdraft for occasional use is a good thing, but using a large overdraft for much of the month is often a sign of financial problems.
In 2016 14% of consumers used their overdraft every month.
Identifying repeat users
From December 2019, banks will have to identify “repeat overdraft users”. The FCA has not given a definition, except to say that it is likely that someone who has been overdrawn in every month for the last year should be classed as a repeat user.
Banks must decide which repeat users are in financial difficulties. The FCA gives general guidelines, including looking for:
- an upward trend in the number of days an overdraft is used in a month and the size of the borrowing;
- changes to regular credits or debits that may indicate that the customer’s general situation has got worse;
- refused payments or increased unauthorised overdraft usage.
Talking to the customers and offering options
For repeat users who the bank doesn’t think are in financial difficulty, the bank will have to send letters warning them about their overdraft usage and its costs.
Where a repeat user appears to be in financial difficulty, the bank has to try to talk to the customer about their situation. Then it should offer suitable options to reduce overdraft use over a reasonable period of time and to address financial difficulties:
- There is no definition of “a reasonable period”. Three or four years is used in assessing people with persistent credit card debt but I would expect it to be less if the overdraft amount was not large.
- The suitable options could include offering a loan at a lower rate of interest to repay the overdraft, or reducing or freezing interest and charges on the account.
- It seems likely that reducing or freezing charges would lead to an arrangement to pay being recorded on your credit record.
Banks will have to explain to the FCA how they intend to do all this, and then monitor how well their plan is going. They will have to report to the FCA after 6 and 12 months. So the FCA will be able to see whether a bank’s plan is making a difference in practice.
We will have to wait and see what happens here.