FCA counts the cost of high-cost credit: a possible ban on unarranged overdrafts

The FCA has published a Feedback Statement on its review of the high-cost credit market which pulls together the evidence and feedback it received following a Call for Input (CfI) in November last year. With talk of a possible ban on unarranged overdraft fees and suggested changes to arranged overdrafts, the FCA could be making big changes to the way firms lend.  After reviewing the impact the high-cost short term credit (HCSTC) price cap has had on consumers since its introduction in January 2015, the FCA has also confirmed that the HCSTC price cap will remain at its current level for the next three years.

Mind the cap

The HCSTC cap limits default fees to £15 a day, interest to 0.8% per day and ensures consumers cannot be charged more than 100% of the value of a loan in fees and interest.  The FCA heralds the cap as a success, claiming that it has led to 760,000 borrowers saving a total of £150 million a year.  On top of this it reports that consumers who have been turned down for HCSTC products have not generally turned to other forms of high-cost credit or illegal money lending.  Debt charities also report seeing far fewer consumers with debt problems linked to HCSTC.  As a result of the FCA's findings that the cap has had a positive impact on consumers, it has decided to keep the HCTSC cap at its current level and will next review the cap in 2020.

The end of unarranged overdrafts?

The headline point to emerge from the Feedback Statement is that the FCA is considering a "fundamental reform" of unarranged overdrafts which includes an assessment of whether they should exist at all.  The FCA points to the following factors in support of its view that there is a substantial problem with unarranged overdrafts in their current form:

  • Unanticipated charges and lack of transparency. The FCA has criticised the complex pricing structures that accompany unarranged overdrafts and notes the generally low awareness amongst consumers about the charges they face.
  • High charges. Charges for consumers who borrow with an unarranged overdraft are high compared to the charges for other high-cost credit services – particularly those allowed under the price cap for HCSTC.
  • Repeated use. The CfI revealed that many consumers are using unarranged overdrafts every month and their repeated use is unlikely to be the best option for consumers in vulnerable situations.
  • Distribution of charges. Charges for unarranged overdrafts are highly concentrated on a minority of customers and the FCA is concerned about the distributional effects of this, in particular that this group are paying for the costs of providing current accounts.

The FCA has stated its intention to explore how firms make overdrafts available and charge for them, and how consumers' behaviour and circumstances interact with product features and charges.  However, it seems reluctant to explore a cap on charges (as many respondents suggested in the CfI), claiming that this would only address one of the symptoms and would not tackle the problem of repetitive use by consumers, without creditworthiness considerations.

Reform to arranged overdrafts?

The FCA's concerns also extend to arranged overdrafts, which it claims are being used in a persistent and unsustainable manner by many consumers. In particular, the FCA is concerned that arranged overdrafts could be contributing to the following problems for consumers:

  • Long term indebtedness. Including arranged overdrafts in the "available funds" information and allowing customers to incrementally increase their arranged overdrafts risks normalising long term debt for consumers.
  • Masking financial difficulties. Consumers may be borrowing more than is affordable because their credit limit is set inappropriately.
  • Unanticipated charges. Fixed monthly charges as well as interest on overdrafts may be unreasonably expensive for light users of arranged overdrafts.

The FCA's next step will be to carry out additional analysis to better understand the harms to consumers of arranged overdrafts and to consider whether it should be intervening as it is doing in the credit cards market to reduce persistent debt.  For more on the FCA's proposals to tackle persistent credit card debt, take a look at our FIsion blog post 'Credit cards – the FCA's solution to a persistent problem'.

A future for HCSTC?

The FCA has not made any plans to intervene in the HCSTC market just yet. However, it will continue to investigate the issues outlined above and aims to consult on proposals concerning both overdrafts and other forms of high-cost credit in Spring 2018.  In light of the suggestion that unarranged overdrafts could become a thing of the past, the industry will no doubt be keen to make their voices heard on the FCA's next steps.

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