LONDON (Reuters) – Britain’s banks and building societies will have to charge the same amount for all overdrafts from April 2020, the Financial Conduct Authority (FCA) said on Friday, in a radical change that will raise questions about the future of free in-credit banking.
The watchdog has already capped interest rates for payday loans and prices of rent-to-own goods after pressure from lawmakers to tackle the high cost of credit for vulnerable consumers.
It said the changes would make overdrafts simpler, fairer and easier to manage, protecting the millions of consumers, and particularly the more vulnerable ones, who use overdrafts.
“The overdraft market is dysfunctional, causing significant consumer harm,” FCA Chief Executive Andrew Bailey said in a statement.
Confirming proposals first aired in December last year, the FCA said that banks and building societies would be banned from charging higher prices for unarranged overdrafts than for arranged overdrafts.
In 2017, banks earned more than 2.4 billion pounds ($3.1 billion) in overdrafts alone, nearly a third from unarranged overdrafts.
The FCA also banned fixed fees for borrowing through an overdraft, calling an end to fixed daily or monthly charges, instead requiring that overdrafts are priced using a simple annual interest rate, making it easier for customers to shop around.
Banks have been criticised for using higher fees for unarranged overdrafts to help to subsidise other services. Changes to that system will therefore raise questions about the future of widely available free banking for customers who remain in credit.
“We are simplifying and standardising the way banks charge for overdrafts. Following our changes, we expect the typical cost of borrowing 100 pounds through an unarranged overdraft to drop from 5 pounds a day to less than 20 pence a day,” Bailey said.
The watchdog said that, with immediate effect, payments for “refused” services, such as when a cheque bounces, should be in line with actual costs incurred.
The FCA said it expected “refused” fees to fall from around 5 pounds to 2 pounds, to prevent banks using them to recoup money lost from lower unarranged overdraft fees.
Christopher Woolard, executive director for strategy and competition at the FCA, said “free-in-credit” banking was a core strategy for banks to gather low-cost deposits.
“We think there are many reasons why free-in-credit banking will continue to be this strategy. Simply reforming the overdraft market is not the only factor at play here.”
Consultants KPMG said the changes would hit banks’ revenue but were likely to spur innovation in the longer term.
Next week, the FCA will announce measures for the “buy now, pay later” sector before moving on to ensuring that all changes it has made in the high-cost credit sector are being properly applied.