UK Banks Issued Two-Weeks Notice By FCA To Explain Hike In Overdraft Rates

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• Banks in the UK have two weeks to render an explanation to the FCA, explaining the rationale behind the drastic increase in overdraft rates.
• Some banks have proposed to charge as high as 49.9% in overdraft fees, while many have planned to charge a flat rate of around 40%.
• The FCA has recommended banks to ensure the financial well-being of their vulnerable customers using an overdraft facility.

According to a notification issued by the Financial Conduct Authority (FCA), banks operating in the UK have been given two weeks to issue an explanation into the planned hike in overdraft fees that will negatively impact around 8 million Britons. The FCA has also issued a warning that action would be taken against banks that deliberately cause harm to customers using their overdraft services.

This notification comes as a response to the drastic increase in overdraft fees being charged by numerous banks in the UK. According to reports, HSBC, RBS, Nationwide, and Santander, have planned to revise their overdraft rate to a flat rate of around 40%, over twice as much as some of these banks were previously charging their customers.

These changes have been proposed ahead of the revised FCA rules that are planned to come into effect in April 2020.

The rates being charged by other lenders are planned for revision as well, and reportedly they would be basing their overdraft rate on the estimated risk posed by each account. For example, Lloyds plans to charge an overdraft rate of up to 49.9% to those customers that have a bad credit rating.

The changes in the rules proposed by the FCA were aimed at reducing the dysfunctionality in the overdraft market. These rules would effectively stop lenders from charging fixed fees on a daily or monthly basis, and also from applying a higher rate on overdrafts that have been unauthorized compared to authorized overdrafts.

However, according to the FCA, the revised rates on arranged overdrafts, as proposed by the banks, would leave around 18.2 million customers (around 30% of all customers) in a worse position.

Usually, the FCA gives a longer deadline for such requests, hence banks in the UK find themselves in a tough position to render an explanation within two weeks for the proposed hike in overdraft rates.

According to a study conducted by the FCA in 2017, it was discovered that overdraft services earned a cumulative £2.4 billion to lenders in that year. The study also highlighted that a significant portion of these earnings came from customers that were the most vulnerable.

The FCA has recommended that banks, as well as building societies operating in the UK, needed to take effective steps to ensure the financial well-being of their at-risk customers, especially after the proposed hike in overdraft rates. According to a statement released by the FCA, the regulatory authority would be closely monitoring efforts made in this respect.

According to UK Finance, the banking trade body in the UK, lenders have devised a strategy whereby they would contact customers with repeat overdraft usage to help them reduce their cost of borrowing by considering alternatives. Eric Leenders, who works for UK Finance, has highlighted the commitment of the UK banking industry to ensure the financial health of all customers, and continued collaboration between banks and the FCA in this respect.

However, Leenders also said that the changes proposed by the FCA may not have been entirely effective as they have led to an increase in overdraft fees. According to him, this two-week notice issued by the FCA to the banks is an effort to remedy the unwanted impact of the FCA’s proposed changes to the overdraft market.