UK Edition
Hefty overdraft fees under scrutiny as watchdog reviews payday loan cap
Banks that hit customers with large fees for unarranged overdrafts could be told to change their practices as part of a new review by the financial regulator.
The Financial Conduct Authority will scrutinise all forms of high-cost credit including overdrafts and payday loans, which have been subject to a price cap for almost two years.
“As an organisation, we have already taken many steps to address the risk of consumer harm by putting in place new rules for high-cost, short-term credit firms and taking action against non-compliance across all credit markets,” said chief executive Andrew Bailey.
“We have come up to the point of reviewing the cap on payday lending, making now the right time to take a broader view of the issues around high-cost credit, including unarranged overdrafts, and to consider whether our requirements remain appropriate.”
The Competition and Markets Authority recently stopped short of capping overdraft fees.
The payday loan cap was introduced in January 2015 to prevent customers from paying more than double their original loan as a result of fees and charges, even if they fell behind on the payments.
Since the FCA took over consumer credit duties in April 2014, around 800,000 fewer people have taken out a short-term loan, while approximately four in ten lenders have left the market.
"The cap on costs has effectively seen a partial shutdown of the payday loans industry that has benefitted many - saving them from the nightmare rates of interest and the hellish life that being chased by a payday company brings," said Martin Lewis, founder of Money Saving Expert.
"And while much of the market for those loans was built by marketing, and advertising, rather than real demand – since the cap there has been some migration to other forms of painful short-term high-cost lending – most notably guarantor and logbook loans."
Research commissioned by the Consumer Finance Association, which represents short-term lenders, found that the average cost of a loan is around 0.7pc per day, slightly below the price cap of 0.8pc and down from 1.3pc before the new rules were introduced. Eight in ten customers said that a short-term loan was the only credit available to them.
The debt charity StepChange welcomed the regulator's plans to look at overdrafts as a form of high-cost debt.
"The need for caps in other markets has already been accepted, as with payday loans and credit cards," said StepChange chief executive Mike O'Connor.
"There is ongoing consumer detriment from overdraft fees. Unnecessary delays in action risks further harm to financially vulnerable consumers."
The findings of the review will be published in mid-2017.