Rip-off overdraft charges targeted by financial watchdog in 'biggest shake-up in a generation'

The finance watchdog says the overdraft shake-up is the biggest overhaul in a generation. Credit: PA

Rip-off overdrafts are to be outlawed, under news plans revealed by the financial watchdog.

A radical overhaul of overdrafts to make them simpler, fairer, and easier to manage have been confirmed by the Financial Conduct Authority.

Its proposals include stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts.

The regulator said it is introducing the reforms to "fix a dysfunctional overdraft market".

The changes aim to help protect the millions of consumers who use overdrafts, particularly more vulnerable customers.

However, the changes will not be introduced until April 2020 - instead of December this year.

The cost of unarranged overdrafts is to be targeted by the shake-up. Credit: PA

The FCA said the changes represent the biggest overhaul to the overdraft market for a generation.

The FCA has announced that it is:

- Stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts;

- Banning fixed fees for borrowing through an overdraft - calling an end to fixed daily or monthly charges, and fees for having an overdraft facility;

- Requiring banks and building societies to price overdrafts by a simple annual interest rate;

- Requiring banks and building societies to advertise arranged overdraft prices with an APR (annual percentage rate) to help customers compare them against other products;

- Issuing new guidance to reiterate that fees for refused payment should reasonably correspond to the costs of refusing payments;

- And requiring banks and building societies to do more to identify customers who are showing signs of financial strain or are in financial difficulty, and develop and implement a strategy to reduce repeat overdraft use.

Gillian Guy, of Citizens Advice, says overdraft charges are confusing for many. Credit: .

Gillian Guy, Chief Executive of Citizens Advice, said overdraft charges can have serious knock-on effects for people’s debt and mental health.

She added: "These new rules should help thousands of people from getting trapped in a debt spiral.

“Many people who seek our help with overdraft problems have had trouble understanding the way the fees are calculated.

“If, after these measures are introduced, people still pay over the odds, the FCA should review the need for an interest rate cap to ensure no one is paying back more than twice what they borrowed.”

Household debt has continued to rise as people live on the never-never. Credit: PA

  • Key figures around overdrafts

Here are some key figures relating to overdrafts, showing how charges are highly concentrated around some customers - often those who can least afford it:

- Firms made an estimated £2.4 billion in revenue from overdrafts in 2017, according to the Financial Conduct Authority.

- Nearly a third (30%) of this came from unarranged overdraft fees and charges.

- Around 19 million people use an arranged overdraft each year.

- In 2016 and 2017, firms made around 25p for every £1 loaned through arranged overdrafts over the year before costs.

- Around 14 million people use an unarranged overdraft each year.

- In 2016 and 2017, firms made around £2.50 for every £1 loaned through unarranged overdrafts over the year before costs.

- According to figures from Citizens Advice, overdraft issues overwhelmingly affect socially-disadvantaged people.

Of the people who went to the organisation with a problem last year, two in five had a disability or long-term health condition, two in five had a monthly income of less than £1,000, and one in four were single parents