Nearly £1bn saved by customers since overdraft charges shake-up, regulator finds

It said people with an arranged or unarranged overdraft saved, on average, £17.40 in charges in 2021.

People have collectively saved nearly £1 billion due to a shake-up of rules around overdrafts, according to calculations by the Financial Conduct Authority (Dominic Lipinski/PA) (PA Archive)

People have collectively saved nearly £1 billion due to a shake-up of rules around overdrafts, according to calculations by the City regulator.

The rules, introduced by the Financial Conduct Authority (FCA), reduced high fees for unarranged borrowing and swept away complex charging structures, which made it hard for people to compare borrowing costs.

The £1 billion in savings for customers came from two separate measures.

More than £500 million was saved due to pricing rules that came into force in April 2020, the FCA said.

Another £486 million was saved due to measures to help customers manage repeated overdraft use, which came into force in December 2019.

The FCA’s evaluation found each customer who had an arranged overdraft or access to an unarranged overdraft saved, on average, £17.40 in charges in 2021 due to the new pricing rules.

Sheldon Mills, executive director of consumers and competition at the FCA, said: “We know that overdrafts offer a convenient way to help some people manage temporary cash flow issues, but some banks were charging more than 80% APR (annual percentage rate) on arranged overdrafts, once fees and charges were factored in.

“The action we took to simplify overdraft charges and to tackle high unarranged overdraft fees has saved people across the UK almost £1 billion in total.

“Such savings are vital as people manage cost-of-living pressures.

“We expect banks and building societies to price fairly and support those in difficulty and we encourage consumers to shop around for the best current account to suit their needs.

“We expect banks to work with customers who repeatedly use their overdrafts, to help them understand the options available to reduce their reliance on overdrafts.”

The rules on pricing required firms to stop charging fixed fees for overdraft borrowing, to charge no more for an unarranged overdraft than an arranged one, to price overdrafts with a single annual interest rate, and advertise overdrafts with a representative APR.

Firms must also now identify and take action to support customers who frequently use their overdraft, resulting in high cumulative charges that are either harmful to the customer or show that the customer is experiencing or at risk of financial difficulties.

The FCA estimates that consumers will save between £88 million and £105 million in charges a year, from now on, due to actions to tackle repeat use.

Overdrafts are intended for short-term or emergency use so consumers should consider other methods of credit if they find they need to borrow for longer, the regulator said.

The FCA also said that while many firms are meeting its expectations, gaps were found, particularly regarding how firms monitor and review the effectiveness of their policies and procedures for customers who repeatedly use their overdraft.

Some firms use a wide range of measures, such as missed payment data or use of other credit products, to identify and monitor customers more likely to be in potential or actual financial difficulty.

Some also identify how their policies and procedures had been adapted through a process of regular review.

But the FCA also found some firms use limited criteria to define repeat use, potentially leading to fewer customers being identified and monitored and increasing the risk that those customers experiencing financial difficulties would not receive the support they require.

A few firms assess customers on an ad hoc basis, without a clear framework for identifying repeat use customers, the regulator found.

All firms included in the FCA’s review will be sent the good practice examples so they can improve where needed.