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7 June 2019, 08:19
Finance watchdog FCA has said the overdraft change is the biggest overhaul in this generation.
It’s been revealed that banks will now be banned from sneakily charging you extra on your overdraft.
According to the Financial Conduct Authority, the new rules - put in place before 6 April 2020 - aim to help protect millions of vulnerable customers and stop what it calls "a dysfunctional overdraft market".
Lenders will no longer be able to charge a fixed fee for borrowing cash through an overdraft, which can currently cost huge amounts if unarranged.
Customers will instead have to pay an annual interest rate on the borrowed amount just as they do for other types of loans.
Banks made over £2.4billion from overdraft fees in 2017, with around 30% of that figure coming from unarranged overdrafts.
The FCA also revealed that 1.5% of people paid more than 50% of these fees in 2016, with those in deprived areas more likely to be hit.
Some unauthorised overdraft fees even work out around ten times more expensive than payday loans.
FCA chief executive Andrew Bailey said: "The overdraft market is dysfunctional, causing significant consumer harm.
"Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, which are often ten times as high as fees for payday loans.
"Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges, that are both a result of and driver of poor competition."
The FCA has announced it is:
- Stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts;
- Banning fixed fees for borrowing through an overdraft - calling an end to fixed daily or monthly charges, and fees for having an overdraft facility;
- Requiring banks and building societies to price overdrafts by a simple annual interest rate;
- Requiring banks and building societies to advertise arranged overdraft prices with an APR (annual percentage rate) to help customers compare them against other products;
- Issuing new guidance to reiterate that fees for refused payment should reasonably correspond to the costs of refusing payments;
- And requiring banks and building societies to do more to identify customers who are showing signs of financial strain or are in financial difficulty, and develop and implement a strategy to reduce repeat overdraft use.