Overdraft repeat use: good practice and areas of concern

As part of our wider work to understand how firms are supporting customers facing cost of living pressures, we asked all firms that provide overdrafts to personal account customers to share with us their overdraft repeat use strategies. We reviewed these strategies and set out our findings below.

Who this applies to 

These examples will be of interest to firms that provide overdrafts to personal account customers.

Guidance these examples refer to

Our rules on overdraft repeat use are set out in the Consumer Credit sourcebook (CONC)—specifically chapter 5D. In September 2020, we published our finalised guidance: Overdrafts and coronavirus: additional guidance for firms[1].

This guidance builds on our rules in CONC 5C and 5D as well as Principle 6 ('A firm must pay due regard to the interests of its customers and treat them fairly') and Principle 7 (‘A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading).

Whilst the guidance was issued to address exceptional circumstances arising out of coronavirus, it is also relevant for borrowers in financial difficulties due to other circumstances such as the rising cost of living as well as meeting the requirements of the forthcoming Consumer Duty. 

What we looked at

At the start of this year, we assessed the policies and procedures that firms have in place for their overdraft repeat use borrowers to ensure they are meeting our expectations around treating customers fairly.

We wanted to understand if the policies that firms had in place would, in our view, appropriately identify customers who were at risk of financial difficulty and provide them with appropriate support. We also wanted to understand how firms monitored the outcomes that customers received and evaluate whether their policies were working well. 

We set out below the findings of our review. Where we reference good practice, these are positive examples we have found from our review. 

What we found

Finding 1: Identifying and monitoring of overdraft repeat use customers

Under CONC 5D.2.1, we require firms to establish, implement, and maintain clear and effective policies, procedures, and systems to monitor and review overdraft usage and identify those with a pattern of repeat use.

In our review we found:

Good practice:

• Some firms used a wide range of measures, such as missed payment data or use of other credit products, to identify and monitor repeat use customers, using analysis of historic data to provide a clear rationale for the metrics used to identify those customers more likely to be in potential or actual financial difficulty.
• A few firms combined the metrics used to identify repeat use to target remedies for those customers using their overdrafts repeatedly and who were at risk of high charges.
• Some firms identified how their policies and procedures had been adapted through a process of regular review, demonstrating a test and learn approach to the formation of their strategies.

Areas of concern:

• Some firms used limited criteria to define repeat use, potentially leading to fewer repeat use customers being identified and monitored and increasing the risk that those customers experiencing financial difficulties would not receive the support they required. 
• A few firms assessed customers on an ad hoc basis, without a clear framework for clearly identifying repeat use customers.

Finding 2: Communicating with customers and gathering information

Under CONC 5D.3, we require firms to take an appropriate and proportionate approach to communicating with customers with a pattern of repeat use. 

For those customers not showing signs of actual or potential financial difficulty, we require firms to highlight the repeat use and indicate to the customer that they should consider whether it is leading to high avoidable costs. 

For customers showing signs of actual or potential financial difficulties, we expect firms to go further by also encouraging the customer to contact the firm to discuss their situation and to explain that doing nothing could make things worse. We also expect firms to provide contact details for not-for-profit debt advice bodies.  

In our review we found:

Good practice:

• Some firms used a wide range of communication tools to engage with repeat use customers; for example, letters, emails, and in-app messaging and push notifications.
• A few firms reviewed and adjusted the content and frequency of their messages to customers, using insight from customer-based research to evolve their approach.
• Some firms used bespoke, personalised communications for repeat use customers, explaining the costs of their repeat use and the ways they could reduce their overdraft use.

Areas of concern:

• Some firms were overly reliant on customers contacting them following an initial communication from the firm, as a firm should take reasonable steps to contact the customer to discuss their situation where the customer has not contacted the firm after a reasonable period. 
• Some firms did not communicate differently with those customers showing signs of actual or potential financial difficulties and those who did not. 

Finding 3: Interventions to support customers

If appropriate, in light of the information gathered, we expect firms to identify and set out suitable options to help their customers reduce their overdraft use over a reasonable period of time and address their actual or potential financial difficulties, in such a way that does not adversely affect their financial situation. Some of the options we might expect firms to take to support customers include:

• Advice on budgeting and money management.
• Providing contact details for not-for-profit debt advice bodies and other relevant bodies and encouraging customers to contact one of them.
• Offering alternative credit on more favourable terms, provided that, if this would be accompanied by suspension or removal of an existing credit facility, it would not cause financial hardship to the customer.
• Offering forbearance, such as reducing or waiving interest and other charges or (where applicable) allowing additional time to pay, where this would not unduly delay further help to the customer or permit further deterioration of the customer’s financial position.
• Reducing the credit limit or the suspension or removal of the overdraft facility (or reminding the customer that they can ask the firm to take these steps), provided that such reduction, suspension or removal would not cause financial hardship to customers.

In our review we found:

Good practice:

• Some firms offered a range of interventions to support customers to reduce their overdraft usage; for example, reducing APRs, payments arrangements, forbearance, and write offs.
• A few firms had dedicated sections on their websites offering help and support on budgeting and money management, with tools showing the costs of overdraft repeat use.
• Some firms had clear processes in place for customers showing actual or potential financial difficulty, directing them to specialist financial guidance teams to identify the appropriate intervention.

Areas of concern:

• A few firms did not provide information on the types of forbearance options that might be available to customers.
• Some firms did not provide evidence of how they tailored their approach for those customers in vulnerable circumstances and/or for those customers most likely to be in financial difficulty.

Finding 4: Monitoring the effectiveness of repeat use policies and procedures

Under CONC 5D.4, we require firms to monitor and periodically review the effectiveness of their policies, procedures and systems for repeat use customers, and update and adjust them as appropriate.

In our review we found:

Good practice:

• Some firms had in place processes for reviewing their policies, procedures, and systems periodically, and identified the incremental changes they had made in response to that information.
• A few firms used a range of metrics to monitor the effectiveness of their policies, procedures, and systems, which were reported monthly to an internal monitoring forum.
• Some firms had clear lines of accountability in terms of the senior management team responsible for the policy.
• One firm had good evidence of the changes it made and those it considered but did not implement, with leadership actively involved in reviewing the outcomes of monitoring and challenging the business to innovate and find ways to deliver even more effective customer outcomes.

Areas of concern:

• Some firms did not provide evidence of any systematic review of their policies, procedures, and systems.
• A few firms waited for FCA intervention before considering whether they should review their approach.
• Some firms did not provide data to show whether their strategies were working in terms of reducing the number of overdraft repeat users and/or the size of their overdraft balances.

Next steps

While many of the firms were meeting our expectations, some were not. We have written to all firms highlighting the findings of our review.

To further support firms in their planning process for the Consumer Duty, we would note the below regarding their overdraft repeat use strategies and interventions.

Meeting the requirements of the Consumer Duty

The Consumer Duty[2] comes into force for open products on 31 July 2023, and firms should consider its requirements when reviewing and developing their overdraft repeat use strategies and interventions.

From the perspective of the Duty, in particular the consumer understanding outcome, we would expect firms to pre-test their repeat use strategies/interventions and communications where appropriate (including through behavioural testing) and refine them (in light of experience) to ensure the target customers are likely to respond appropriately to the messaging they receive about the need to change their account behaviour.

Our Consumer Duty Finalised Guidance includes examples of the types of testing approaches and different data sources firms could use to monitor customers’ behaviour to ensure their approach delivers good outcomes.

Under the Duty’s rules, firms must equip retail customers to make decisions that are effective, timely, and properly informed. This may include developing nudge practices to help customers more generally to manage their finances better (e.g. in choosing between overdraft use, credit cards, or other forms of credit).

Firms should also refer to the relevant provisions under CONC and our New Consumer Duty Policy Statement PS22/9[3].