The City watchdog has ordered banks to do more to help the 19 million people who regularly use their overdrafts but has dismayed campaigners seeking a cap on the £2.3bn fees made when customers go into the red.
The Financial Conduct Authority’s 18-month review into high-cost credit stepped back from a cap on overdraft fees because of fears it could be challenged in court by the banks, triggering sharp criticism from charities and MPs pushing for tougher action.
Customers will instead be given more alerts via mobile phones, warning of charges as well as requiring the introduction of online tools to make the cost of overdrafts clearer. Messages on cash machines that customers have “available funds” that include their overdraft will be banned.
John McDonnell, the shadow chancellor, called the steps from the FCA “deeply disappointing”, while Rachel Reeves, the Labour chair of the business select committee, said: “While the FCA ‘consult’ on some meagre remedies and ‘discuss’ further action, banks are allowed to continue to rip people off. This is not good enough.”
The FCA said it would consider introducing a price cap on rent-to-own, where stores such as BrightHouse sell cookers and household appliances on weekly payments. It found that customers ended up paying more than £1,500 for ovens that sell in other high street shops for less than £300.
The price cap, estimated to benefit about 400,000 people, is likely to come into force next April after consultation with the industry. It follows a drive by debt charities and campaigners, including the actor Michael Sheen, who put intense pressure on the regulator to act.
Andrew Bailey, the chief executive of the FCA and the frontrunner to be the next governor of the Bank of England, told the BBC “we don’t want to screw up” on price caps following a supreme court challenge that went in favour of the banks in 2009.
However, he left the door open to a possible price cap in future, saying it could form part of a wider retail banking review due later this year. “Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping in to an overdraft in the first place,” he said. “However, we believe more fundamental change is needed in the way banks charge customers for overdrafts.”
The FCA’s main recommendations were:
- Mobile alerts warning of potential overdraft charges.
- Stopping the inclusion of overdrafts in the term “available funds”.
- Requiring online tools to make the cost of overdrafts clearer.
- Introducing online tools to assess eligibility for overdrafts.
- Making it clear that overdrafts are credit or borrowing.
The FCA said it would introduce rules preventing home-collected credit firms, such as Provident Financial, from offering new loans or renewing old ones during home visits without a specific request from customers. Catalogue and store credit firms will be forced to do more to help customers avoid persistent debt.
In total, the FCA said the crackdown will save consumers about £200m a year but campaigners said it had not gone far enough.
Gareth Shaw of Which? said some overdraft charges could be seven times more expensive than a payday loan and called on the government to intervene as the FCA “continues to drag its heels”.
He said: “It’s wrong that the regulator continues to delay taking action, leaving consumers affected by this unfair practice trapped in debt.”
The Bank of England has become increasingly concerned about rapid growth in personal borrowing, which is returning to levels unseen since the financial crisis amid sluggish wage growth and rising levels of inflation since the EU referendum almost two years ago.
The latest figures show Britons increasing their borrowing at the fastest rate since November 2016 during April, when about £1.8bn worth of debt was racked up on credit cards, personal loans and car finance.
On the stock market, shares in banks and doorstep credit providers were largely unmoved. Goodbody Stockbrokers said: “The high-cost credit market will face little turbulence as a result of new regulation, a bit of a relief for the major players in this space.”
