The city regulator today effectively gave the green light to banks to reintroduce overdraft rates of nearly 40 per cent within weeks, despite the coronavirus pandemic potentially leaving millions struggling financially.
The Financial Conduct Authority announced it would not launch an investigation into overdraft changes announced by banks, nor would it require lenders to continue to provide cheaper overdraft rates except to those financially impacted by the virus.
It means the UK’s biggest high street names are now gearing up to reintroduce sky high overdraft rates, having previously reduced them over the last three months after the FCA told them to.
Watch out: Overdraft costs were lowered for three months due to the coronavirus but banks are set to bring back charges of close to 40% soon
In January the regulator wrote to the UK’s biggest banks to ask them to explain their new overdraft charges, after almost all of them had announced they were setting rates at close to 40 per cent interest, nearly double the average APR of credit cards.
It came after the FCA faced a backlash for rules it had introduced designed to cap the cost of unarranged borrowing by requiring banks to dispense with tiered rates and daily fees, set all overdrafts using one interest rate and not charge more for unapproved borrowing.
While the FCA did not set a price cap, almost all banks ended up charging the same price, with Barclays the only major bank not to charge over 39 per cent for borrowing. Even then it charged only a marginally lower 35 per cent.
Challenger banks Monzo and Starling adopted a pricing model based on customer credit scores, with borrowers charged between 15 per cent and 39 per cent.
The FCA again defended its actions, saying the changes would result in just three in 10 arranged and unarranged borrowers paying more, and would cost the banks £500million.
The regulator wrote to banks in January asking them to explain how they came to their new overdraft charges, almost all of which were the same, but said Wednesday it would not investigate them
It said this morning: ‘We have analysed the strategic, competitive and financial drivers of banks’ overdraft pricing decisions based on their responses.
‘Having reviewed the evidence we obtained we do not intend to open a formal investigation at this stage.’
It added that it expected banks to ‘respond competitively to one another’, despite the fact that six banks had set their new overdraft rates at 39.9 per cent for most customers.
Banks including HSBC, Nationwide, NatWest and Santander are planning on bringing back borrowing rates of 39% APR, having previously lowered them over the last three months
Andrew Hagger, founder of personal finance site Moneycomms, said: ‘In reality there isn’t any competition between lenders to shout of.’
This is Money’s sister title the Financial Mail on Sunday found in February borrowers would only be able to save £8.61 on an overdraft of £1,000 by switching from the most expensive to the cheapest deal, down from £28.45 before banks all set their prices at similar levels.
Hagger added: ‘Nationwide was first to show its hand by hiking to 39.9 per cent and the rest of the market pretty much adopted the same stance.
‘It’s disappointing for customers of Nationwide, HSBC and First Direct that the regulator has deemed that more than doubling overdraft rates to be acceptable.’
The FCA pledged to keep monitoring overdraft costs but said in a separate announcement that rules which required banks to offer lower rates during the coronavirus pandemic would not be extended, something This is Money hinted at a fortnight ago.
These mandated lower rates helped the average cost of an overdraft fall a massive 15 percentage points to 10.93 per cent in April, according to the Bank of England.
Customers negatively impacted by the coronavirus should have any overdraft borrowing outside of a £500 emergency fee-free buffer reduced but banks will be able to set their own prices from now on.
Peter Tutton, head of policy at the debt charity StepChange, said: ‘Overdrafts will need careful oversight as the support measures become more discretionary on the part of banks.’
Banks gear up to reintroduce sky high overdraft rates
The websites of most banks state they will once again begin to charge sky high borrowing rates from later this month.
HSBC will once more charge 39.9 per cent for overdrafts from 9 July, as will Santander, with both previously charging 19.9 per cent over the last few months.
NatWest, the only bank to drop its rate prior to being asked to by the FCA, will charge 39.49 per cent from 14 July, up from 19.89 per cent now.
| Bank account | Current overdraft rate | New planned rate for majority | Date new rate comes in |
|---|---|---|---|
| Nationwide FlexAccount | 18.9% | 39.9% | 17 July |
| HSBC Advance | 19.9% | 39.9% | 9 July |
| First Direct First | 19.9% | 39.9% | 8 July |
| M&S Bank | 19.9% | 39.9% | 9 July |
| RBS/NatWest Select | 19.89% | 39.49% | 14 July |
| Barclays Bank Account | 19.51% (capped at £90 a month) | 35% | 9 July |
| Santander | 19.9% | 39.9% | 9 July |
| TSB | 19.84% | 39.9% | 8 July |
| Lloyds/Halifax | 39.9% (27.5% for Club Lloyds customers) | No change | No change |
Andrew Hagger added: ‘The current coronavirus crisis with many banks offering interest-free overdrafts up to £500 has undoubtedly taken centre stage and defused some of the customer anger, but as and when banks return to charging their new tariffs in full, some current account customers will be in for a nasty shock.’
Anthony Morrow, founder of app-based financial adviser OpenMoney, said: ‘It is ironic that the announcement is coming amidst increasing number of reports into redundancies and cost cutting at businesses.
‘The impact of coronavirus really hasn’t been felt yet and I’m not going out on a limb by saying there are really tough times ahead.
‘The interesting part is that the FCA are placing a lot of emphasis on the firms choosing how they want to deal with these problems from handling vulnerable customers to pricing of products especially overdrafts.
‘The optics won’t be great if all the banks suddenly ramp up to the max regardless of whether they use the other hand to help already struggling customers who are now struggling with higher costs.’
Trade body UK Finance told This is Money the matter was a commercial decision for individual banks.
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