The UK’s Financial Conduct Authority (FCA) has announced a package of interventions in personal current account overdrafts.
The changes include:
banning providers from charging higher prices to customers who exceed their pre-arranged borrowing limits;
banning providers charging any fixed fees for overdrafts;
requiring providers to set the price of overdrafts through a single annual interest rate;
arranged overdraft prices to be advertised through an APR;
requiring banks more to identify and help customers who repeatedly use their overdraft and may be in financial difficulty.
The FCA’s aims with these reforms include simplifying pricing, enhancing transparency and reducing the concentration of unarranged overdraft charges on a relatively small number of customers disproportionately living in more deprived areas.
The reforms will require a significant shift in the pricing models currently used by most providers. In particular, it is expected that most providers currently charging for unarranged overdrafts will see a significant decline in revenue from those charges.
How providers adapt and respond will be closely watched. One possibility is that providers will raise arranged overdraft prices to recover their costs. That will shift the cost of overdrafts away from unarranged overdraft customers to arranged overdraft customers. The FCA has been clear that such an outcome is better for customers overall as it shifts the cost away from more vulnerable customers.
At the more transformational end of possibilities providers might look more broadly at their personal current account (PCA) pricing structure, perhaps re-evaluating the current free-if-in-credit model that is currently an industry standard. This could lead to a shift in the way that PCAs are priced, with implications for the prices charged to almost all of the UK’s banking customers, whether they use an overdraft or not.
Frontier advises on these and other regulatory issues in financial services.
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