Bank overdraft fees: all you need to know about the changes | Banking

A major shake-up of bank overdrafts is on the way after the UK’s financial regulator said the market was “dysfunctional” and “causing significant consumer harm”.

What’s happening?

The Financial Conduct Authority (FCA) is pressing ahead with a package of measures that should make overdrafts simpler, fairer and cheaper. One of the headline changes is that banks and building societies will no longer be able to charge higher fees for unauthorised overdrafts than for agreed overdrafts. The new rules will be in force by 6 April 2020.

So what’s the problem?

Where do we start? Authorised overdraft costs vary hugely and are often baffling – some banks impose daily fees, some charge monthly fees, some charge interest on the amount owed, and some use a combination of these. As the FCA said: “Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges.” Meanwhile, vulnerable customers are disproportionately affected by excessive charges for unauthorised overdrafts, which the regulator said were often 10 times as high as fees for payday loans.

Do lots of people use overdrafts?

There are 26 million UK overdraft users (authorised and unauthorised). They are a huge cash cow for banks, which made more than £2.4bn from them in one year alone (2017).

How pricey are some overdrafts?

The costs vary dramatically. Unauthorised overdrafts can be hideously expensive: the FCA said the typical cost of going just £100 into the red without permission was £5 a day – which the regulator expects to fall to less than 20p a day as a result of its changes.

Give me some examples of costs …

Let’s take a standard current account-holder who borrows £500 on an authorised overdraft over seven days. At NatWest they will be charged £7.75 (£6 monthly fee and £1.75 interest), while if they are at app-based Monzo it’s £3.50 (50p a day), and at Barclays it’s £5.25 (75p a day up to £1,000). Some current account holders are paying a lot less. Nationwide’s lowest cost is £1.67 in interest for its FlexAccount.

What about in the meantime?

Don’t feel you have to wait – if you are not getting a good deal, think about switching your account. Some banks have overdraft calculators on their websites which let people compare the charges at other institutions.

Any downsides to all this?

There could be. Rachel Springall at the financial data provider Moneyfacts group said that in recent years, many current account providers had brought in fixed fees, which were now being banned. “This is going to take some time to unravel, she said, adding that consumers should keep a close eye on their current account and any perks they enjoyed because banks might look elsewhere to recoup their losses resulting from the new rules.

Similarly, PricewaterhouseCoopers (PwC) warned: “The potential loss of income these rules create, and the additional monitoring costs, could lead to firms seeking to make up their losses through higher arranged overdraft rates, loss of interest-free buffers, additional current account charges or tighter lending criteria.”