"Fundamental" change to overdrafts announced that could see 3 MILLION people pay an awful lot less
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Britain's financial watchdog has launched a sweeping crackdown on high-cost credit as part of efforts to protect vulnerable consumers.
Following a wide-ranging review into the sector, the Financial Conduct Authority is proposing reforms to bank overdraft charges, rent-to-own operators, door-step lending and catalogue credit and store cards.
FCA chief executive Andrew Bailey said: "High-cost credit is used by over three million consumers in the UK, some of who are the most vulnerable in society.
"Today we have proposed a significant package of reforms to ensure they are better protected including the possibility of a cap on rent-to-own lending.
"The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer."
The FCA estimates that banks raked in an estimated £2.3 billion in revenue from overdraft charges in 2016, arguing that the system needs "fundamental reform".
What they're doing about it
The watchdog is considering a number of measures to make it easier for customers to manage their accounts, including mobile alerts warning of potential overdraft charges and stopping the inclusion of overdrafts in the term "available funds".
This is on top of requiring online tools to make the cost of overdrafts clearer, introducing mechanisms to assess the eligibility for overdrafts and making it clear whether overdrafts are credit or borrowing.
Bailey added: "Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping in to an overdraft in the first place.
"However, we believe more fundamental change is needed in the way banks charge customers for overdrafts. Given the size of the market our work here will be completed as part of our wider review into retail banking."
The FCA believes that these measures alone will save customers up to £140 million a year.
Overdraft changes
(Image: Getty Images)
On overdrafts, the regulator is looking at brining in changes that would:
Force banks to offer mobile alerts warning of potential overdraft charges
Stop the inclusion of overdrafts in the term ‘available funds’
Require online tools to make the cost of overdrafts clearer
Introduce online tools to assess eligibility for overdrafts and
Make it clear overdrafts are credit or borrowing
Rent-to-own changes
The rent-to-own sector has also come under scrutiny from the watchdog, which found that costs for 400,000 customers who rely on the sector can be exceptionally high.
It cited examples of people having paid over £1,500 for an electric cooker which could be bought on the high street for less than £300.
The FCA is looking at capping prices and will look at how bring one in - hopefully by by April 2019.
It's also looking to ban the sale of extended warranties at point of sale - saving customers £7.7million a year.
Doorstep loans
The FCA plans to introduce new requirements to raise standards in disclosure and sales practices. These will stop home-collected credit firms offering new loans or refinancing during home visits without the customer specifically requesting this.
They will also bring greater controls over refinancing. Changes in this area are estimated to save consumers up to over £34 million a year.
Catalogue credit and store cards
Catalogue credit and store card firms will be forced to do more to help customers avoid persistent debt – the same way as credit card providers have been made to do by the FCA. These changes are estimated to save consumers up to £27.5 million a year.
More help still needed
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While the changes look like good news, campaigners are asking for more.
“Just last week we revealed that unarranged overdraft charges can still be more than seven times more expensive than a payday loan - it's wrong that the regulator continues to delay taking action, leaving consumers affected by this unfair practice trapped in debt," said Gareth Shaw Which? money expert.
“Last summer, the FCA expressed serious concerns about how unarranged overdrafts work, and now almost a year later it is still refusing to take action. As the FCA continues to drag its heels, the Government must urgently intervene to ensure unarranged overdraft charges are brought into line with arranged overdrafts, to finally help all those struggling from these rip-off fees.”