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UK watchdog 'keeping close eye' on overdrafts as interest rates jump

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
Lloyds are among the banks that have hiked their overdraft rates to 40%. Photo: Paul Hackett/Reuters

The UK’s financial watchdog is “keeping a close eye” on the overdraft market after multiple major banks introduced interest charges of almost 40%.

Banks — including Lloyds (LLOY.L), Santander (SAN.MC), and HSBC (HSBA.L) — have recently announced they are raising overdraft fees to 39.9%. Challenger banks Monzo and Starling are also setting their interest charges at similar rates.

READ MORE: Fears on overdraft fees as HSBC hikes rate to 40%

The rise in interest charges come in response to new rules from the FCA clamping down on complex overdraft fees. The new rules, which come into force in April, require banks to show an annual interest rate rather than charging daily fees for unarranged overdrafts. The changes are meant to make it easier for customers to shop around when they need credit and the regulator believes seven out of 10 overdraft users will be better off.

However, banks have responded by raising overdraft rates across the board. Tom Selby, a senior analyst at stockbroker AJ Bell, said the FCA’s reforms had created a “waterbed effect”.

“In the process of pushing down on unarranged fees, the costs faced by those in arranged overdrafts are set to balloon,” Selby said. “Millions of people in arranged overdrafts are now worried about their borrowing costs doubling overnight.”

The Financial Conduct Authority (FCA) said on Tuesday it has asked banks for more information on why and how they decided to set rates at these levels.

The FCA also stressed it was making sure banks were looking after vulnerable customers who relied on overdrafts.

“We expect firms to take positive steps to help customers who may be worse off or in financial difficulties as a result of these changes,” the watchdog said. “We have asked to see their plans for how they are dealing with the most affected customers.

“We expect banks to take steps to support them, for example firms could reduce or waive interest, offer a continuation of overdraft borrowing at current rate of interest, or agree a repayment programme – including a personal loan.”

READ MORE: Why your bank balance may drop today as overdraft rules change

The regulator defended its decision to make changes to the overdraft market, saying the old system of daily fees for being overdrawn was “dysfunctional”.

“Consumers found it very difficult to understand what charges they were paying and charges for unarranged overdrafts were very high, regularly 10 times the cost of a payday loan,” the watchdog said. “These charges fell heavily on consumers who are vulnerable. 

“Our reforms of the market have ended high unarranged charges, saving typical borrowers up to £55 per month on an unarranged overdraft of £100 over seven days.”

The FCA said it would take further action if banks weren’t doing enough to protect vulnerable customers. Customers concerned about their overdraft rate rising should contact their bank, the regulator said.

READ MORE: Monzo and Starling raise interest rates on overdrafts