HSBC (HSBA.L) will introduce a flat overdraft charge of 39.9% from next year, fuelling fears about rising overdraft rates at banks across the UK.
HSBC announced Wednesday that it would introduce the new flat fee from March next year, covering both arranged and unarranged overdrafts.
The lender is the second bank to hike its overdraft interest rates to 39.9%, following an announcement from Nationwide in July.
The rises come in response to new rules from the Financial Conduct Authority (FCA) clamping down on complex overdraft fees. The new rules come into force next April and require banks to show a simple annual interest rate so customers can shop around when they need credit.
HSBC currently charges between 9.9% and 19.9% to overdraft customers and charges a £5 daily fee for going into an unarranged overdraft. That fee will be abolished, in line with new FCA rules, and the bank said it will introduce an interest-free £25 buffer on Bank Account and Advance accounts.
“By simplifying our overdraft charging structure we are making them easier to understand, more transparent and giving customers tools to help them make better financial decisions,” Madhu Kejriwal, HSBC UK’s head of lending and payments, said.
HSBC said seven out of ten customers who currently use overdrafts will benefit from the changes.
An FCA review found just 1.5% of banking customers paid more than 50% of total unarranged overdraft fees across the industry in 2016.
“We see harm to consumers – particularly to vulnerable consumers – from the disproportionate burden of high charges and the repeat use of overdrafts,” the FCA wrote in its report, published last year.
Rachel Springall, a finance expert at Moneyfacts.co.uk, said: “Customers who carefully plan their overdraft use will now be worse off. Those who are struggling financially and hit their unarranged limit frequently will be much better off.”
The rate hikes by HSBC and Nationwide will fuel fears that other banks will introduce high flat fees as they fight to keep lucrative overdraft revenues. Springall said it was “quite likely” that other lenders would announce rate rises ahead of the new rules coming into force.
“I will be very surprised indeed if other banks did not follow suit,” Dr. Roger Gewolb, executive chairman and founder of FairMoney.com, told Yahoo Finance UK.
Dr. Gewolb said 40% was an “outrageous rate” and called for a cap on overdraft interest. He said most customers could take out personal loans at much lower rates.
“To be fair, banks should be required to make people aware of the unsecured personal loans on offer to them elsewhere outside of the overdraft,” he said.
The Competition and Markets Authority recently ordered HSBC to hand back £8m in overdraft fees to 115,000 customers, after the bank failed to send texts telling them they were about to go into their overdrafts.