U.K. Banks' $3 Billion Overdraft Business Faces FCA Overhaul

(Bloomberg) -- The U.K. markets regulator began toughening rules on banks’ 2.3 billion-pound ($3 billion) overdraft business, while leaving more “radical options” for later.

Lenders would need to make overdraft fees clearer and alert customers to potential charges under proposals the Financial Conduct Authority published on Thursday. The London-based regulator said it will now consider stiffer measures such as banning fixed fees and tackling steep prices for unarranged overdrafts.

The changes proposed on Thursday could save customers as much as 140 million pounds a year by making overdraft costs more transparent and stopping people from “unintentionally dipping in to an overdraft in the first place,” said Andrew Bailey, the FCA’s chief executive. The FCA still sees a need for “more fundamental change” in the way banks charge for overdrafts, he said.

“The FCA is taking a cautious approach, which is to be welcomed,” said Greg Stevens, CEO of the Consumer Credit Trade Association, an industry group. “Providing credit to low-income consumers will always be an emotive topic,” he said. “The FCA gets this and it is taking its time to get the balance right.”

‘Urgent Action’

The pace of the FCA’s reforms is too slow for John McDonnell, the Labour Party’s shadow chancellor of the exchequer, who said it was “deeply disappointing” the regulator failed to cap overdraft interest and charges. “With nearly 3 million in persistent overdraft debt, urgent action is needed,” he said on Twitter.

Over the past year, the FCA has been scrutinizing high-cost credit products such as overdrafts as well as the rent-to-own, home-collected credit and catalog-credit markets. The work has been watched closely by subprime lenders such as Provident Financial Plc, which provide services such as home credit and car loans to riskier borrowers at higher interest rates.

Provident said by email that the FCA’s focus on ensuring the provision of credit and protecting consumers “aligns with how we serve our customers.” The company’s shares were down slightly in London trading on Thursday.

In a report last October, the FCA said that a quarter of U.K. adults -- 12.9 million people -- had been overdrawn in the previous 12 months, and 3.1 million adults had used an unauthorized overdraft facility, either by exceeding their limit or never arranging one. Firms’ annual revenues from such unarranged overdrafts were as high as 440 percent of the average amount outstanding in 2016, more than 10 times the highest level for arranged overdrafts, according to the FCA.

Payday Loans

The FCA’s move is its latest attempt to rein in high-cost consumer credit products. An earlier cap on payday-loan interest charges and fees has saved borrowers about 150 million pounds a year, the regulator has said.

For the rent-to-own market, the FCA will assess how a price cap could affect the industry and how it might be structured. If changes are needed, the FCA would aim to introduce them by April 2019. The regulator is also seeking feedback on a proposal to ban the sale of extended warranties at point of sale, which could save consumers up to 7.7 million pounds a year.

The regulator proposed additional disclosure requirements for firms that collect credit at borrowers’ homes that the regulator said could save consumers 34 million pounds a year. On catalog credit, firms will have to do more to help customers avoid persistent debt.

©2018 Bloomberg L.P.

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