New rules on overdrafts will benefit seven out of 10 bank customers but some of those who go into the red could end up paying more, according to the City regulator.
The Financial Conduct Authority (FCA) has introduced new regulations that, from April 1, bar banks from charging customers more for unarranged overdrafts than for arranged ones.
About 14m people use an unarranged overdraft each year, according to the FCA. These users will be better off or will see no change. Research by the City watchdog found that fees for unarranged overdrafts were frequently 10 times as costly — and for some consumers as much as 20 times — as payday loans, an expensive form of borrowing.
Christopher Woolard, executive director of strategy and competition at the FCA, said the new system was simpler and more transparent. “Our changes expose the true cost of an overdraft. We have eliminated high prices for unarranged overdrafts.”
He added that the rules would result in a fairer distribution of charges, “helping vulnerable consumers, who were disproportionately hit by high unarranged overdraft charges, and many people who use their overdraft from time to time”.
Ahead of the implementation of the rules, many banks and building societies have announced new overdraft rates, with most choosing to set a rate close to 40 per cent. Lloyds Banking Group has instead opted to charge some customers “personalised” rates of up to 49.9 per cent from April, but said most will pay a rate of 39.9 per cent on their overdrafts.
Experts said the new rules would help those borrowers who slip into unarranged overdrafts but some warned that the reforms could hit those with large arranged overdrafts.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said that by curtailing one revenue stream, banks may try to make it up in other ways, such as increasing costs for arranged overdrafts.
“Borrowers with large, arranged overdrafts, are already paying through the nose for their borrowing,” she said, “but the new rules could see their rates double. It’s going to be very difficult to persuade them that the FCA’s overdraft reforms are good news for borrowers.”
But Mr Woolard said overdrafts were not designed to be used for large amounts for long periods of time and consumers should consider other methods of credit if they find they needed to borrow for longer.
The rules are also intended to make it easier for borrowers to compare rates.
Laura Suter, personal finance analyst at investment platform AJ Bell, said: “What is positive is that instead of a mess of different fees and rates, people will now clearly be able to see how much their bank is charging them for their overdraft borrowing, easily work out what it’s going to cost them and weigh up whether there are better and cheaper options out there.”
She said one option for borrowers who regularly go into the red is to move to a provider that offers an interest-free overdraft. “Even if the limit is lower than the amount you have borrowed, it could save you a decent amount of money across the year.”