High-Cost Credit Review: Overdrafts consultation paper and policy statement
Consultation Paper CP18/42***
December 2018 CP18/42 Financial Conduct Authority High-Cost Credit Review: Overdrafts consultation paper and policy statement
How to respond Contents
We are asking for comments on 1 Executive summary 3 this Consultation Paper (CP) by 2 The wider context 8 18 March 2019. 3 The harm we are trying to reduce 14 You can send them to us using the 4 Pricing interventions 25 form on our website at: www.fca. org.uk/cp18-42-response-form. 5 Repeat use 43 6 Possible wider effects of this consultation Or in writing to: and other remedies considered 48 Sara Woodroffe Financial Conduct Authority 7 Competition remedies: policy statement 52 12 Endeavour Square 8 Proposals to amend our competition remedy rules 78 London E20 1JN
Telephone: Annex 1 020 7066 1844 Questions in this paper 79
Email: Annex 2 [email protected] Cost benefit analysis 81
Annex 3 Compatibility statement 139
Annex 4 List of non-confidential respondents 145
Annex 5 Technical Annex 147
Annex 6 Abbreviations in this document 148 How to navigate this document onscreen Appendix 1 Made rules (Legal instrument) returns you to the contents list Appendix 2 Draft Handbook Text takes you to helpful abbreviations Appendix 3 Proposed Amendments to the Finalised Guidance: Payment Services and Electronic Money – Our Approach
2 Financial Conduct Authority CP18/42 High-Cost Credit Review: Overdrafts consultation paper and policy statement Chapter 1
1 Executive summary
Fundamental change is needed in the overdraft market
1.1 We see harm to consumers – particularly to vulnerable consumers – from the disproportionate burden of high charges and the repeat use of overdrafts. In 2016, more than 50% of firms' unarranged overdraft fees came from just 1.5% of customers. People living in deprived areas are more likely to incur these fees and in some cases unarranged overdraft fees can be more than 10 times as high as fees for payday loans.
1.2 So we are proposing reforms to the way banks charge for overdrafts, including tackling high charges for unarranged overdrafts.
We propose simpler and fairer pricing
1.3 We are consulting on proposals to simplify the pricing of all overdrafts and end higher prices for unarranged overdrafts by:
• stopping firms from charging higher prices when customers use an unarranged overdraft, because the difference in costs for providing unarranged and arranged overdrafts does not fully account for the difference in pricing
• banning fixed fees for borrowing through an overdraft (other than fees for refusing a payment due to lack of funds (‘refused payment fees’), which firms are entitled to charge for under the Payment Services Regulations 2017)
• ensuring the price for each overdraft will be a simple, single interest rate – no fixed daily or monthly charges
• requiring firms to advertise arranged overdraft prices in a standard way, including an Annual Percentage Rate (APR) to help customers compare them against other products
• issuing new guidance to reiterate that refused payment fees should reasonably correspond to the costs of refusing payments, and explain the costs that may be included, and
• telling banks to do more to identify overdraft customers who are showing signs of financial strain or are in financial difficulty, and to help them to reduce their overdraft use
3 CP18/42 Financial Conduct Authority Chapter 1 High-Cost Credit Review: Overdrafts consultation paper and policy statement
We are not proposing a simple price cap now as this would not fix the problems
1.4 We think there are risks to a price cap in this market – signalling that prices at, or about, the cap are acceptable. It could prompt providers with low, or no, charges to raise prices. It could discourage consumers from trying to understand their overdrafts and prevent more effective competition developing. We believe that our proposals can deliver better outcomes for consumers than a price cap.
1.5 But we will monitor the market and keep firms’ overdraft pricing under review. If we see signs that prices are becoming harmful we will consider introducing a price cap.