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Overdraft providers asked to explain new 40% rates

By Vicky Shaw, PA Personal Finance Correspondent

Banks are being asked by the regulator to explain their overdraft pricing decisions, after a string of providers pegged their new rates at around 40%.

Overdraft providers are introducing the new rates as they look to comply with new rules being introduced by the Financial Conduct Authority (FCA) from April 6, which will prevent providers from charging higher prices for unarranged overdrafts than for arranged overdrafts.

The changes aim to make overdraft pricing simpler and fairer, reducing the burden on some people who currently pay high charges.

Firms will need to charge a simple annual interest rate – without additional fees and charges for using an overdraft.

The changes will mean the new rates for some customers will be around double what they have been previously.

Some critics of the plans have argued they could penalise people who borrow responsibly and remain within their arranged overdraft limits.

Across the market, seven out of 10 overdraft users will be better off or see no change, the FCA has previously said – and some arranged overdraft customers have already been paying rates equating to more than 80% once fees and charges are factored in.

Borrowers who are currently deep into their arranged overdraft could end up paying more, while those currently being hit with high unarranged overdraft charges may find they pay less.

The FCA said on Tuesday that it expects banks to support customers, by reducing or waiving interest, offering a continuation of overdraft borrowing at the current rate of interest, or agreeing a repayment programme – including a personal loan.

Customers who are worried about the impact of any changes should contact their provider.

In a letter it has written to banks, the FCA is asking them to explain their pricing decisions.

It reads: “We are writing to you to understand more about your new overdraft pricing and the measures you have in place to help customers who may be adversely impacted by the changes you are making to this pricing.”

The letter asks banks for a summary of how they arrived at their new overdrafts rate or rates, including internal and external factors that were considered and a timeline showing any points when rates were substantively revised.

The FCA previously found unarranged overdraft fees are often 10 times as high as charges for payday loans, and fall disproportionately on vulnerable consumers.

It anticipates the cost of borrowing £100 through an unarranged overdraft will fall from a typical £5 per day to under 10p per day.

Among the changes that have already been announced, Lloyds Banking Group customers are to be charged new “personalised” overdraft rates of up to 49.9% from April.

HSBC, First Direct and M&S Bank will all introduce rates of 39.9% from March 14.

NatWest will charge up to 39.49% for overdraft borrowing and Barclays will introduce a new overdraft rate of 35%.

TSB will charge customers 39.9% from April.

Nationwide Building Society has already imposed a single rate of 39.9% across its adult current account range.

Gareth Shaw, head of money at Which?, said: “The changes introduced to provide clarity on overdraft fees and charges, and protect the most vulnerable, must also allow customers to shop around.

“The current lack of competition on overdraft pricing is disappointing, so it is right the regulator is taking a closer look.

“Banks should also be clear on how they are communicating the changes to customers and helping more of them choose the right type of credit product for their circumstances.”

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “The banks may have shot themselves in the foot by announcing sky high arranged overdraft rates that bear a spookily similarity to one another.

“The FCA warned all along that if the banks didn’t offer competitive rates, it could consider overdraft charge caps.”

Eric Leenders, managing director of personal finance at UK Finance, said the overdraft market is “highly competitive” with more than 90 products on offer.

He said: “Banks provide an online cost calculator for customers to work out how much the cost of their overdraft borrowing will be, reflecting any product features such as interest-free buffers.

“These changes build on the range of measures already introduced by the industry, such as text alerts for unarranged overdrafts and mobile banking apps which have been shown to reduce charges by 24%.

“Banks will contact repeat overdraft users to discuss options to reduce their reliance on their overdraft and any alternative options to reduce the cost of borrowing.

“We would always urge customers to speak to their bank and arrange an overdraft in advance to ensure payments are honoured.”