This article provides an overview of the FCA’s consultation paper “High-Cost Credit Review: Overdrafts consultation paper and policy statement”, setting out a timeline on how the FCA is taking this matter forward, and recommendations on what action an overdraft provider could consider taking in light of the CP’s contents.
On 18 December 2018 the UK Financial Conduct Authority (FCA) published consultation paper CP18/42, “High-Cost Credit Review: Overdrafts consultation paper and policy statement” (the CP), which sets out various proposals to reform the ways in which banks and building societies can charge for overdraft facilities.
The CP aims to both increase consumer awareness of, and prevent risk to / abuse of vulnerable individuals through the use of, disproportionately high charges on, and repeated usage of, such overdraft facilities.
This article provides an overview of the CP, a timeline on how the FCA is taking this matter forward, and recommendations on what action an overdraft provider could consider taking in light of the CP’s contents.
Overdrafts consultation paper and policy statement - key takeaways
The FCA seeks to reform radically the ways in which banks and building societies can charge consumers for overdrafts. The CP sets out rules which seek to address low awareness and engagement in this market (which is in line with the findings of the FCA’s recent Strategic Review of Retail Banking Business Models) and seeks to address the complexity of overdrafts, the level of charges, and harm to consumers from repeated use. The FCA combines specific measures and obligations as part of the overdraft provider duty of care.
Proposed reforms include the following:
- Overdraft costs: The FCA proposes to simplify overdraft pricing by requiring a simple, single interest rate. Fixed daily or monthly charges would be prohibited. Buffers (ie an agreed overdraft amount that is non-chargeable) would still be allowed, as well as charging different customers (based on risk) holding the same type of account different interest rates. The FCA consider that this will allow for risk based pricing.
- Presenting costs: Overdraft providers will be required to standardise how overdraft fees are advertised. This will include an Annual Percentage Rate (APR) and should be coupled with a calculator tool. The FCA intends that this will stimulate active competition between overdraft providers in respect of their overdraft prices, and for consumers to be able to compare overdrafts and other credit products. According to FCA research, consumers find examples which include interest rates plus calculator/£&p cost figures easier to understand than £&p per day figures.
- Unauthorised overdrafts: The FCA has proposed that the pricing of unauthorised overdrafts needs to match authorised overdrafts. Please note that the FCA acknowledges that this may result in increased costs for authorised overdrafts.
- Fees for refusing a payment due to lack of funds: The overdraft provider is entitled to charge fees for refusing a repayment due to lack of funds (refused payment fees), in line with the Payment Services Regulations 2017 (PSRs). The FCA is emphasising and giving increased attention to the existing PSR requirement that such fees should correspond to proportionate and genuine costs incurred by the overdraft provider resulting from a refused payment. It intends to ask firms to prove this. The FCA has already indicated that costs relating to fraud detection, impairments, statements and industry levies are not considered “genuine” in this regard.
- Customer monitoring: Overdraft providers will be required to do more to identify and assist consumers making use of an overdraft who are showing signs of financial strain or who are in financial difficulty, including developing a strategy to help customers to reduce their overdraft usage. By requiring an overdraft provider to monitor customer behaviour more closely, this will increase an overdraft providers ability to identify and assist customers who are facing financial difficulties.
- Communication with customers: Overdrafts can no longer be included in “available funds”. Consumers would see a negative balance, the intention being to develop their understanding that an overdraft is indeed a debt. Overdraft providers will also be required to send text messages or push notification alerts to address unexpected overdraft usage.
- Market comparison: Overdraft providers will be required 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 current account with an overdraft. This runs in parallel with drives to drive competition through sharing access to banking data through Open Banking and payment account information services. There is a question about how valuable these tools are unless they are bespoke to/use the data of consumers.
The FCA’s proposals in CP 18/13, “High-cost Credit Review: Overdrafts” (May 2018) have been modified so that private banks, mainly, out of scope of these proposals, but not entirely. The private banks that are out of scope are those defined a bank or an “operationally distinct brand” of a bank over half of whose personal current account customers have provided declarations of eligibility, or meet the condition that would enable them to do so. To meet this condition, they must have held assets to the value of not less than £250,000 over a period of twelve months ending on a day which falls not more than three months before the date of the declaration of eligibility. Private banks that form part of a bank with a retail arm should consider whether they do have a sufficiently operationally distinct brand to rely on this exemption. The applicable requirements include the following:
I. Mandatory information: The paper proposes that private banks comply with requirements to provide certain mandatory information at account opening if an overdraft is provided or subsequently applying for an overdraft on the basis that “These rules simply seek to ensure that information provided is clear and prominent. We consider this would benefit all consumers.” This information includes an explanation that an overdraft is a borrowing facility, a general description of its features, principal risks, exceeding an overdraft limit and credit file implications. Whilst the form of language is not mandatory, private banks will have to consider how to incorporate it into their processes and documentation.
II. Proportionate refused payment fees: All firms must ensure that charges for refusing payments must be proportionate and reasonably attributed to costs, and evidenced as such. The FCA is asking for feedback on the list of costs it would not permit in this calculation, which includes fraud detection, impairments, statements and industry levies.
The FCA is considering whether to extend the reform requirements to apply not only to consumers but to micro-businesses as well. Given that micro-businesses tend to act as consumers (especially as it is not always clear when they act in a business or personal capacity), the regulator is increasingly leaning to the view that they should be treated in the same way.
The CP is in two parts, covering: (i) reforms that will be implemented, and (ii) proposed reforms for which the FCA seeks consultation (eg the overdraft costs, the proposed change of structure of the overdraft facility and avoiding repeated usage). The FCA makes clear that different timetables apply to the two elements of the CP.
In terms of the proposed reforms, the FCA has requested responses by 18 March 2019. Final rules on all reforms will then be published by early June 2019.
The FCA foresees a split implementation whereby requirements around pricing and repeat usage would come into effect in early December 2019 and requirements around low levels of awareness and engagement with overdrafts (eg communications and calculator tools) on 18 December 2019 (although this might be brought forward to early December 2019).
There are various steps and questions an overdraft provider should consider ahead of the implementation of the reforms. Some examples are listed below.
a) Overdraft providers should consider whether their terms and conditions permit the changes to charging structures that the FCA requires. Even though this is a regulator mandated change, if implemented, the overdraft provider needs to consider to make such changes to the overdraft product in a fair, clear and transparent way for consumers.
b) Overdraft providers should consider which costs are currently covered in refused payment fees and their proportionality, in order to amend where needed in light of what the FCA will determine in this respect as being proportional.
c) Overdraft providers should break down the different overdraft proposals and identify the commercial impact of the proposed reforms, in terms of cost, implementation and customer impact, to determine which products will commercially remain viable or how improvements can be made to the offering.
d) Overdraft providers should consider how to position themselves in light of the reforms, considering amongst others customer transparency of messaging and charging, and also taking into account any technological reforms required.
e) Overdraft providers should consider whether it is commercially feasible to include any daily or monthly overdraft fees in the interest rate applicable, whilst also considering the impact thereof on the APR the FCA is proposing to be included in advertising regarding overdrafts.
f) Overdraft providers should consider the private bank position in respect of the reforms, to check whether or not they are in scope of the majority of reforms.
If you have any questions on the above, please contact Sophie Lessar.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.