New rules to make overdrafts easier to manage have come into force.
The changes brought in from Wednesday by the Financial Conduct Authority (FCA) mean that someone’s “available balance” or “available funds” can no longer include their overdraft.
The measures make it clearer that overdrafts are a form of credit rather than a customer’s own money – and also help to tackle confusion that may lead consumers to accidentally dip into their overdraft.
Christopher Woolard, executive director of strategy and competition at the FCA, told the PA news agency: “The changes today are really about making it easier to manage an overdraft and also to help (prevent) people from falling into traps around debt in the first place.
“When you check your balance, if you’re standing at the cashpoint or you go online, when your bank tells you what’s available, they actually have to tell you what’s your money, so in other words how much cash have you actually got in the bank.
“When we did a lot of customer research people regard (overdrafts) often as their money.”
Overdraft users will benefit from our new rules in a number of ways pic.twitter.com/51Sm8OIM47
— Financial Conduct Authority (@TheFCA) June 7, 2019
The changes are part of a wide-ranging shake-up of overdrafts, which from April 6 2020 will also see new pricing rules introduced.
From April 6, banks and building societies will be stopped from charging higher prices for unarranged overdrafts than for arranged overdrafts.
Fixed fees for borrowing through an overdraft will also be banned next year.
And banks and building societies will be required to advertise arranged overdraft prices with an APR (annual percentage rate) to help customers compare them against other products.
Some providers have already been announcing new single overdraft charges as they prepare to comply with the rules coming into force next year.
Nationwide Building Society introduced a blanket rate of 39.9% across its adult current account range in November – and HSBC, First Direct and M&S Bank will impose the same rate from March 14 2020 – leading some commentators to say that being charged 40% to go in the red could become “the new normal”.
Some providers currently charge the equivalent of higher annual rates than 39.9% – but because charges may sometimes be shown in pounds and pence rather than as a percentage rate the overall costs can be hard for people to compare.
Around 14 million people use an unarranged overdraft each year.
The FCA expects to see the cost of borrowing £100 through an unarranged overdraft fall from a typical £5 per day to under 10p per day.
A typical arranged overdraft user uses it to borrow less than £250 for seven days each month.
The charges from mainstream banks and building societies for this overdraft, before the FCA’s intervention, ranged from just over 80p per month to just under £7 per month.
The complexity of different banks’ overdraft charging structures has made it hard for customers to understand how much they would pay.
Going forward, a £250 overdraft over seven days could cost around £1.65, assuming the bank prices it at 39.9%.
If a customer uses a £1,000 arranged overdraft all month, and an unarranged overdraft of £100 for five days, they could be charged around £40 to £60 per month by some providers.
But if the bank or building society charges at 39.9% this would cost around £30.
From July 2020, the FCA will also require firms to publish a range of overdraft pricing details to highlight the charges people are paying.
Gareth Shaw, head of money at consumer group Which? said: “These important changes will give consumers more clarity about their finances and should help them make informed spending decisions and avoid going into the red.
“We hope to see more banks now coming forward with competitive overdraft pricing and for the regulator to ensure that its transformation of current account overdrafts delivers for customers.”