The new rules for Bank overdraft fees start in April 2020.

Last year the Financial Conduct Authority, (FCA), announced new changes to Bank overdraft fees. The UK financial regulator is calling it ‘the biggest overhaul for a generation.‘

Banks and building societies will no longer be allowed to charge fixed daily or monthly fees for overdrafts.

In addition, there will no longer be higher fees for unplanned overdrafts than for arranged ones.

Banks will also be required to charge a simple annual interest rate on all overdrafts. Overdraft advertisements will need to come with that rate clearly displayed. This is to help consumers compare different products.

In 2017, banks made more than £2.4bn from overdrafts.  30% alone coming from unarranged overdrafts.

Bank overdraft fees particularly affect younger people.

Previous research showed those aged between 35 and 44 were most likely to have some form of overdraft. About 10% of all 18 to 24-year-olds had exceeded their overdraft limit in the previous 12 months.

Of those 16-24-year-olds who have an arranged overdraft, 44% have used theirs during the past 12 months. This group have dipped into their overdrafts more than any other group.

The FCA said the changes would make an overdraft “simpler, fairer, and easier to manage”.

How will this work?  The FCA says: –

There will be no difference between arranged and unarranged overdraft prices – but no cap on the cost either.

An end to monthly or daily fees.

A requirement for Banks to advertise their overdraft rate as a single annual interest rate, or APR.

They continued, Banks will still be able to refuse to make a payment if a customer does not have the funds to cover it, but any resulting fee for the customer must reflect the cost to the bank

Banks must also do more to identify and help customers who are showing signs of financial strain or are in financial difficulty.

When the new rules come into force, the typical cost of borrowing £100 through an unarranged overdraft would drop from £5 a day, to less than 20p, the regulator said.

However, some fear that the costs to those who previously used arranged overdraft charges might rise, or charges for accounts may rise.

Banks must charge simple annual interest rate on all overdrafts.

Banks and building societies will be required to charge a simple annual interest rate on all overdrafts, and overdraft advertisements will need to come with that rate clearly displayed, to help consumers to compare various products.

Last year, the FCA’s chief executive, Andrew Bailey, said that the overdraft market was currently “dysfunctional” and “causing significant consumer harm” because vulnerable customers are often hit by excessive charges for unarranged overdrafts, which can be 10 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,” said Mr. Bailey.

“The decisive action we are taking today will give greater protections to millions of people who use an overdraft, particularly the most vulnerable.”

Eric Leenders, from bank trade body UK Finance, also commented at the time:

“Overdrafts can provide a convenient way for customers to smooth their short-term cash-flow, and there is a highly competitive market in the UK. The banking industry is committed to helping customers manage their money and we will be working closely with the FCA to implement these rules.”

Will the new rules benefit everyone?

If you use an overdraft, how much you pay could be about to drastically change.

For many of us, it means we’ll likely save a few quid every month. But for some, it could get a lot more costly to go into debt.

Many of the major banks have now announced their new charges and how they’ll dish them out.

The BBCs Radio 1 Newsbeat’s programme found 10 major UK banks that will now charge almost 40% interest for going into the red.    They are Lloyds, Halifax, Bank of Scotland,  Monzo, TSB, Barclays, HSBC, M&S Bank, First Direct, Nationwide, Natwest,  RBS and Santander.

Some could pay a ‘truly awful price.’

“People who have arranged overdrafts which they use regularly or long term will pay a truly awful price,” according to BBC Money Box presenter Paul Lewis.

The FCA reckons most people will now avoid unexpected costs but admit there is a significant group of people who will miss out.

For example, someone who set up a £1,000 overdraft limit with their bank.

The rates on these overdrafts are currently around 16% – 20%.

Many of the big banks are raising that figure to around 40%.

So, in the case of a maxed-out £1,000 arranged overdraft, the annual interest would jump from around £180 to almost £400.

Paul says the winners are “people who accidentally (or on purpose) go a bit over what they are allowed for a short time”.

This is often those on daily fees, for example, £5 a day, for just being a few pounds overdrawn.

Also benefitting are those people who dip into their unarranged overdrafts – the borrowing you’ve not agreed with your bank.  Many of those charges will be capped at around £20 a month.

The FCA told us these unarranged overdraft fees “are often ten times as high as charges for payday loans”.

The message is if you recently ignored a text from your bank with something about “fees”, you might soon wish you hadn’t.

The new rules come into effect on 6th April, so there’s a bit of time to make a plan.  Now is the time to take a new look at your overdraft arrangements.

Debt concerns over overdraft charges.

Gillian Guy, chief executive of Citizens Advice, said overdrafts were one of the most common areas of concern when worried consumers contacted the charity.

“Overdraft charges can have serious knock-on effects for people’s debt and mental health. These new rules should help thousands of people from getting trapped in a debt spiral,” she said.

“If, after these measures are introduced, people still pay over the odds, the FCA should review the need for an interest rate cap to ensure no one is paying back more than twice what they borrowed.”

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