The UK Financial Conduct Authority (FCA) has today published an update to its ongoing review into high cost credit products. The review was initiated by a requirement for the FCA to review the price cap that it had placed on high-cost short-term credit, typically known as payday loans. The review was expanded to also look at the wider credit landscape, including overdrafts and other products such as catalogue credit, rent-to-own and home-collected credit.

In its update, the FCA has re-iterated its concerns around the fees and charges applied to unarranged overdrafts, especially when compared to the small amounts that providers lend in these cases. The FCA has found there to be a wide spread in effective interest rates being charged for unarranged overdrafts, reflecting the fact that fees are often fixed and can therefore be high relative to a small amount of borrowing. The FCA has also re-iterated concerns around persistent usage of arranged overdrafts, finding that 6.5% of customers used their overdraft every month in 2015 and 2016, accounting for half of all arranged and unarranged fees.

The FCA has said it will now seek to identify customers who may be suffering harm and considering what remedies might most effectively address any problem identified. The FCA also noted that it will use insight from its separate Strategic Review of Retail Banking Business Models, which is looking across retail banking, in order to try avoid any unintended consequences from new remedies. The FCA is expected to report back in May.

Antti Lemberg, working in Frontier’s financial service practice, said: “The FCA’s review of unarranged overdrafts is rightly assessing whether the way charges currently work is delivering a good outcome for customers. The Competition and Markets Authority has previously looked into the issue of overdrafts and one of its key remedies was the introduction of a maximum monthly charge for unarranged usage. The FCA will need to consider whether this and other remedies are sufficient to resolve the issues being identified. Regulators have not previously considered persistency in arranged overdrafts in any detail, and the challenge will be to identify when arranged overdraft usage becomes a concern, particularly for vulnerable customers. The FCA will also need to balance any concerns against the reasons why some people might use overdrafts on a regular basis – such as convenience – and who are happy to pay for the service offered by arranged overdrafts.”

Frontier advises on these and other regulatory and competition issues in financial services.

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