Overdrafts move into FCA's consumer protection spotlight

The FCA has launched its Call for Input on high-cost short-term credit (HCSTC), including arranged and unarranged overdrafts.

The FCA was already committed to reviewing the HCSTC price cap (introduced into CONC from 2 January 2015) in the first half of 2017.  It has now also decided to look at high-cost products as a whole from a consumer protection perspective, to establish whether they cause detriment and, if so, to which consumers.

Overdrafts as a high-cost credit product

Since taking over the regulation of consumer credit in April 2014, the FCA has concentrated its attention on products it believes pose the highest risks to its consumer protection objective.  So far, its work on payday loans and its market study of competition in the credit card market have been part of this initiative.

The identification of overdrafts as a high-cost product of focus for this latest Call for Input results from stakeholder feedback to the CMA's Retail Banking Market Investigation.  Respondents highlighted issues such as inappropriate use for longer-term borrowing, poor price transparency and the nature and level of charges, particularly for unarranged overdrafts.  While a number of remedies relating to overdrafts will be introduced as part of the CMA's work to improve competition in this area, the FCA has a broader set of statutory objectives, duties, powers and tools than the CMA and has therefore decided, in agreement with the Treasury Select Committee and Parliament, to look in more detail at overdrafts from an additional consumer protection angle.

Rent-to-own loans are also included in the FCA's wider review of high-cost credit products within the Call for Input.  Citizens Advice has recently called for a price cap and compulsory affordability checks to help customers of rent-to-own firms following the HCSTC price cap introduced for payday loans two years ago.  This indicates a trend towards increased focus on the cost of credit in general, including the FCA's intention to understand any potential 'waterbed effect' of the payday loan cap, where consumers who are no longer able to get such loans might move to other less regulated borrowing in the high-cost sector.

What does the FCA want to know about overdrafts?

The FCA needs to collect more data and other evidence to assess the extent, nature and causes of consumer detriment. This will inform its decision as to whether further policy interventions are needed, and whether these should be more consistent across the market than is currently the case.  It is seeking responses to the following questions, accompanied wherever possible by supporting evidence:

  • To what extent do you think overdrafts are a substitute, or alternative, for other high-cost credit products?
  • What do you think are the key issues the FCA should consider on arranged and unarranged overdrafts respectively?
  • What measures could be taken to address these and what would be the risks and benefits?

Next steps

The Call for Input closes on 15 February 2017.  The FCA is looking to complete its work within the first half of 2017.  It asks that interested parties let it know if they would like more time to respond to the questions in Section 1 on high-cost credit more generally, including overdrafts. 

The FCA will consider all responses to the Call for Input and also plans to hold some stakeholder events, in particular relating to the HCSTC price cap review. It intends to publish the outcome of that review in Summer 2017.  Further work on issues relating to high-cost credit and overdrafts identified in the Call for Input will be undertaken from Q2 2017 onwards.

The Call for Input can be viewed here.

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