StepChange Debt Charity comments that new rules on overdraft repeat use [effective from 18 December], will need careful oversight by the Financial Conduct Authority to ensure they break the cycle of financially vulnerable people getting trapped in disproportionately expensive, repeat overdraft use.
The rules are designed to complement the ban on higher fees for unarranged overdrafts that comes into effect from next April. This will also need close FCA monitoring.
Overdrafts are a common, and potentially expensive source of credit use. Among StepChange clients, 46% of people who were helped by the charity in the first half of 2019 had an overdraft, with an average outstanding balance of £1,483. According to the FCA, 14% of consumers used their overdraft every month in 2016, paying 69% of the total of all arranged, unarranged and refused payment overdraft fees. This is one of the reasons why the FCA has intervened to require banks to develop strategies to reduce the repeat use of overdrafts.
Under the new rules that take effect this week, banks must provide the FCA with details of their strategy when the rules start to apply, must monitor progress, and report on the outcome of their monitoring after 6 and 12 months, including details of any change to the total number of repeat users, the total size of their overdraft balances and any other relevant background information. However, there is no requirement for this information to be made publicly available.
Commenting on the new rules, StepChange Debt Charity Head of Policy Peter Tutton said: “The FCA’s new rules are welcome, yet shrouded in mystery at individual firm level. We would urge banks to make public their repeat use strategies, and the FCA to make public the findings of its monitoring. This is important both so that individual consumers know where they stand, and so that public scrutiny is possible of whether firms are engaging with the spirit as well as the letter of the rules.
“Overdraft debt is very common and can be very expensive – often more than the cost of a payday loan. Helping people to reduce repeated, expensive overdraft use is a significant step in reducing the vicious cycle under which the more financially vulnerable you are, the more expensive it is for you to use financial services, potentially pushing you even further into financial difficulty.”