Britain’s financial regulator has launched a major crackdown on high cost credit and overdraft fees following an investigation lasting nearly two years.
The Financial Conduct Authority (FCA) says millions of households which resort to such lending will get greater protection under the new rules which have been designed to crate ‘a rebalancing in favour of the customer.’
The reforms will take in such areas as bank overdraft charges, rent-to-own, doorstep lending, catalogue credit and store cards.
The changes to overdrafts will save customers up to £140 million a year. They include mobile alerts warning people of potential overdraft charges, stopping the inclusion of overdrafts in the term ‘available funds’ and making it clear overdrafts are credit or borrowing.
But it doesn’t end there as the FCA is proposing even more ‘radical’ options such as a ban on fixed fees and ending the difference in pricing between arranged and unarranged overdrafts.
According to the regulator, financial organisations made £2.3 billion from overdrafts in 2016. Almost a third of that total came from unarranged overdrafts which had been taken out by just 1.5% of customers.
FCA chief executive Andrew Bailey said: “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.”
Rent to own
The rent to own sector which has 400,000 customers also came in for heavy criticism. During their investigation the FCA found examples of deals where people had paid as much as £1,500 for such essential items as a cooker which could have been bought on any high street for less than £300.
They are so concerned about the sums involved that they are considering imposing a cap on the sector to protect financially vulnerable consumers.
It might operate in a similar way to the cap imposed on payday lenders in 2015 which restricts the amount customers can be charged.
A ban on the sale of extended warranties at the point of sale will save consumers £7.7 million a year.
The persistent debt suffered by many store card holders and catalogue customers has prompted changes which could save consumers up to £27.5 million a year.
Firms will be required to do more to help their customers to avoid persistent debt in a similar way to the credit card firms are already required to do.
There will be new requirements designed to raise the standard of the doorstep lending market in the areas of disclosure and sales practices.
Firms will be prevented from offering new loans or re-financing during home visits unless the customer specifically requests it.
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.”
More room for improvement
The changes have been welcomed by consumer organisations, but they believe there is still more room for improvement.
Gareth Shaw of consumer champion Which? said: “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.
“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.”
“A ban on the sale of extended warranties at the point of sale will save consumers £7.7 million a year”