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. rood aca o rdi to addr har in th ordrat art ar Prices too high for consumers rir o har Complex price High level Repeat use Lack of awareness structure of fees /engagement di Ban �xed fees Alignment of Early Alerts for borrowing arranged and identi�cation through an unarranged strategies Online overdraft overdraft prices eligibility tool Pricing by single Targeted Online interest rate intervention charges calculator APRs in Clear advertising information at account opening Banning inclusion Policy Statement of overdraft in available funds Consultation Paper Industry agreement Prompts Our proposals are designed to benefit vulnerable consumers 1.6 Unarranged overdraft charges are causing harm to more vulnerable customers. People living in deprived areas are more likely to pay unarranged overdraft charges and refused payment fees than others, and they pay around twice as much in fees and charges as those in less deprived areas. We want overdrafts to be simpler, fairer and easier to manage. We expect our package of changes to reduce charges for unarranged overdrafts significantly. This will disproportionately benefit those vulnerable consumers currently paying the most. 1.7 We expect our proposals to significantly lower charges for overdrafts for those currently paying the highest prices. Overdraft users will be better able to understand the costs, compare prices and get the best deal for them. Our proposed changes would bring overdraft charges well below the level of the current daily cap on high-cost short-term credit lenders (‘payday lenders’). 1.8 We are also implementing reforms to help all consumers better engage with and understand their overdrafts, for example through providing digital eligibility tools, 4 Financial Conduct Authority CP18/42 High-Cost Credit Review: Overdrafts consultation paper and policy statement Chapter 1 cost calculators and alerts to address unexpected overdraft use. Customers will see a negative balance at cash machines if they use an overdraft. We are acting to protect consumers on our detailed understanding of the market 1.9 These changes are informed by our comprehensive analysis of banks’ business models, and how these are changing. act o our rooal Overdraft charges will be more fairly distributed We are proposing a package of remedies that will of fundamentally reform the consumers1.5% paid overdraft market and reduce harm to consumers of unarranged50% overdraft fees in 2016 Unarranged overdrafts will be constrained Charges will be simpler and we are so that charges are no higher banning �xed overdraft fees than for an arranged overdraft The daily interest Only 20% of consumers fully rate for unarranged understand the pricing di�erences and overdrafts charging structures in the current regularly exceeds 10% overdraft market Providers will work with consumers to Consumers will know when they are tackle repeat use borrowing money using their overdraft Alerts make consumers aware of overdraft of consumers use and can help them avoid up to used14% their overdraft every month in 2016 and paid of charges. 25%Consumers will also see a of all arranged, negative balance at unarranged69% and refused payment fees cash machines Consumers will be able to more easily compare overdrafts with each other and with other forms of credit Online tools will help consumers calculate the It will be easier for cost of borrowing consumers to �nd out if they can switch 5 CP18/42 Financial Conduct Authority Chapter 1 High-Cost Credit Review: Overdrafts consultation paper and policy statement Navigating this document 1.10 In Chapter 2 we set out the wider context to our proposals and explain how they help us to meet our objectives. 1.11 In Chapter 3 we present our analysis of the harm we are trying to reduce. 1.12 In Chapter 4 we present our proposals to address the harm we see which is driven by the complexity of overdrafts and the high level of charges. These proposals are: • aligning prices of unarranged overdrafts with arranged overdrafts –stopping firms from charging higher prices when customers use an unarranged overdraft • simplifying overdraft pricing – arranged overdrafts should be priced using a single interest rate on each account • standardising the presentation of arranged overdraft prices to make them easier to compare and to position overdrafts as borrowing – requiring a representative annual percentage rate (APR) in certain advertising for arranged overdrafts • issuing new guidance to help firms comply with existing rules – refused payment fees should reasonably correspond to the costs of refusing payments 1.13 In Chapter 5 we explain our proposals to address the harm from repeat use of overdrafts. We propose firms should: • develop a strategy to reduce repeat use • provide us with their strategy when the rules start to apply, and after any substantial changes • implement their strategy for reducing repeat use, and monitor their progress • report on the outcome of their monitoring after 6 and 12 months 1.14 These proposals are broadly similar to our approach for addressing persistent credit card debt (and the early intervention remedies) (PS18/04), with some changes to reflect the nature of the overdraft market. 1.15 In Chapter 6 we discuss the possible wider effects of our proposals and the other remedies we have considered. 1.16 Chapter 7 contains a policy statement (PS) for the competition remedy rules we have made to address low awareness and engagement in this market. We consulted on these draft rules in CP18/13 and they require: • firms to provide tools, online or within their banking apps, that assess eligibility for overdrafts to reduce barriers for consumers who are considering switching and searching for a PCA with an overdraft • improvements to visibility and content of key general information about overdrafts – in particular, when opening a PCA.