The Financial Conduct Authority has called for industry feedback on overdraft pricing in an open letter, as major banks align overdraft rates at around 40%.
UK neobanks Monzo and Starling raised their overdraft fees in December 2019, following HSBC, Nationwide, TSB, Santander, Halifax, Lloyds, M&S Bank and First Direct’s decisions to abolish monthly overdraft flat fees in favour of overdraft interest free rates.
In June 2019, the FCA announced the need to “fix a dysfunctional overdraft market” in order to protect those most vulnerable. The watchdog called on institutions to remove un-arranged overdraft fees and instead charge a single interest rate by 6 April 2020.
The FCA's letter warns: “We wish to underscore that our rules require you to take measures to help and support those customers who are worse off because of these changes. This is important for all customers and particularly those who are or may be vulnerable.”
The open letter to institutions requests specific feedback as to how banks have arrived at their new overdraft rates and a summary of their approach to dealing with customers who will be worse off following the implementation of new pricing changes. The letter also requests information on the number of customers likely to be worse off because of the rate changes and the strategy in place to provide these individuals with communication and support.
While noting that the request for feedback is voluntary, the FCA adds: “We are also being clear that we expect firms to take positive steps to help customers who may be worse off or in financial difficulties as a result of these changes. We have asked to see their plans for how they are dealing with the most affected customers…We will be keeping a close eye on the market and we will act should we see continued harm.”
Monzo customers are currently charged a fixed 50p per day overdraft fee but from April this year, the fee will shift to an EAR of 19%, 29% or 39% (variable), depending on the user’s credit score.
Overdraft limits will also be increased from £1,000 to £3,000 and Monzo will remove the £20 fee free buffer. The challenger bank claims that 87% of customers will be better off or see a monthly change of less than £1.
Starling, however, will be offering 15%, 25% or 35%, also dependent on risk-based pricing and will remove the £2 maximum monthly interest rate charge.