PS19/16: High-Cost Credit Review: Overdraft policy statement

Read PS19/16 (PDF)

FCA Overdraft proposals consumer research 

Why we have changed our rules

In our Consultation Paper, CP18/42 (December 2018), we explained why fundamental reform was needed to the way banks charge for overdrafts. We proposed radical changes to the overdraft market to address harm from high prices for unarranged overdrafts, complex pricing structures, low consumer awareness and the repeat use of overdrafts.

Our package of remedies to make overdraft pricing simpler, fairer and easier to manage has been widely supported. We are:

• stopping firms from charging higher prices for unarranged overdrafts than for arranged overdrafts;
• banning fixed fees for borrowing through an overdraft – no daily or monthly fees, or fees for having an overdraft facility
• requiring firms to price by a simple annual interest rate
• issuing new guidance to reiterate that refused payment fees should reasonably correspond to the cost of refusing payments and
• requiring firms to do more to identify customers who are showing signs of financial strain or are in financial difficulty and implement a strategy to reduce repeat use

We expect that the changes will result in a fairer distribution of charges, particularly benefitting vulnerable consumers, who are disproportionately hit by high unarranged overdraft charges.

This paper summarises the feedback we received, and our response to it. We are going ahead with our proposals, with some minor changes. We are extending the implementation period for some elements of the package, to ensure that firms have enough time to implement significant changes properly.

In October 2019 we published new rules in PS19/25 that require firms to publish fees and charges for overdrafts as part of the current account service metrics.

Who this applies to

• Banks and building societies which provide personal current accounts. The Policy Statement is concerned with arranged and unarranged overdrafts.
• Payment service providers (PSPs) offering payment accounts that charge for refused payments should have regard to the new guidance on these.

Background to our high-cost credit work

We looked at overdrafts as part of our High-Cost Credit Review.

Our analysis showed that fundamental reform of overdrafts was required. The changes we are making today will reform the market, and lead to significantly improved outcomes for millions of overdraft users.

Next steps

Please read the parts of the paper that are relevant to you.

• We recommend that you read the whole of this document if you are a bank or building society offering overdrafts or a trade body representing these firms.
• Payment service providers offering payment accounts that charge for refused payments should read the relevant section of Chapter 6.
• Firms providing overdrafts to micro-enterprises and small and medium enterprises (SMEs), and firms offering products marketed to consumers as having the same function as an overdraft, should read the section in Chapter 8 regarding application of our proposals.

What will we do next

The new rules will come in to force on 6 April 2020, apart from the refused payment fees guidance, which will take effect immediately and the repeat use rules, which will come into force on 18 December 2019.

The implementation date for the rules we published in CP18/42 is 18 December 2019.

We will monitor the market and keep overdraft pricing under review once the rules have been implemented.