Unarranged Overdraft Fees in Focus
The Financial Inclusion Centre shares its views on the FCA’s High Cost Credit Review: Overdrafts and makes a number of key recommendations.
The Financial Inclusion Centre is an independent, not-for-profit think tank that aims to promote greater financial inclusion and fair and inclusive financial markets. The Centre responded to the Financial Conduct Authority’s (FCA) consultation on overdrafts with their thoughts below:
We commend the additional research and analysis the FCA has undertaken to help us understand the scale and nature of the detriment experienced by vulnerable people who have to use unarranged overdrafts.
Charges on unarranged overdrafts are significantly higher than on arranged overdrafts.
Households in more deprived areas of the country are much more likely to use unarranged overdrafts than other consumers.
Better off, ‘lower-risk’ consumers can switch away to better deals. That option is just not open to the most vulnerable households. Moreover, they are more likely to be hit by unforeseen events out of their control which push them into debt. They are already struggling to make ends meet with little room to reduce spending any further, or do not have savings to fall back on.
We very much support proposals such as alerts to warn consumers when they might be entering an unarranged overdraft. But more direct interventions are needed urgently to protect vulnerable borrowers. We have made a number of calls to the FCA:
Price caps: we are in agreement with the proposals to simplify prices into a single interest rate. The plan to align arranged and unarranged overdraft prices might also produce some benefits. But, compared to an absolute price cap, this is an indirect and, therefore, inefficient way of achieving the desired outcomes. We suggest a daily interest cap with a backstop cost ceiling is the most appropriate method.
Interim consumer protection measures: until a cap on interest rates and fees is introduced, the FCA should target its supervisory activities to ensure that banks are treating vulnerable borrowers fairly. In practice, that means using supervisory powers to stop the use of these charging practices now. This would be a particularly good opportunity for the FCA to use its temporary product intervention powers.
Greater transparency: we have long argued for the introduction of financial inclusion legislation similar to the US Community Reinvestment Act (CRA) and Homeowners Mortgage Disclosure Act (HMDA). We advocate greater transparency on how well individual financial institutions perform against financial inclusion metrics. In the meantime, we would urge the FCA to build on its important Financial Lives initiative and publish more granular data on which communities are facing high levels of financial exclusion and discrimination.