Yahoo Finance Almost 8m overdraft customers to be worse off with FCA changes
Almost 8 million overdraft users will be worse off as a result of new rules coming into effect in April, the financial watchdog has said, as Lloyds Banking Group announced some customers would pay rates of up to 50pc.
The Financial Conduct Authority (FCA) has ordered banks not to charge customers more for unarranged overdrafts than for arranged ones from April 1. Andrew Bailey, chief executive of the regulator, said unarranged overdraft costs are “often 10 times as high as fees for payday loans”.
An arranged overdraft is set up by agreement in advance, whereas an unarranged one is taken out automatically when an account balance dips below zero.
Around 26 million customers use overdrafts. The FCA said seven out of 10 of these will be better off or see no change as a result of its new rules, implying that three in 10 will be worse off. Approximately 14 million people use an unarranged overdraft a year and 9 million use an arranged one.
Banks have responded to the FCA overhaul by setting their new single overdraft rate at a higher rate than their old arranged one. Banks including Nationwide, HSBC, Natwest, RBS and Monzo have already announced plans to move to a single interest rate of up to 39.9pc.
Lloyds Banking Group today became the latest bank to join this fray. It said it would calculate its overdraft interest rates based on customers’ credit rating. Some could pay as much as 50pc in interest if their credit score is low.
John Crossley, of Comparethemarket, a price comparison website, said this rate was “the highest amount we’ve seen announced so far”.
The FCA changes will be the most help to those that occasionally slip into an unarranged overdraft, as the overall cost of this will fall, said Sarah Coles of Hargreaves Lansdown, a stockbroker. But the reforms are less help to current account customers who have big arranged overdrafts, as the price of this will rise.
Ms Coles said: “Borrowers with large, arranged overdrafts, are already paying through the nose for their borrowing, 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.”
The regulator said the trade-off was worth it if unarranged overdraft customers paid less.
Christopher Woolard, of the FCA, said: “Overdrafts were not designed to be used for large amounts for long periods of time. Consumers should consider other methods of credit if they find they need to borrow for longer.”
