The UK’s financial regulator is considering capping the level of fees banks can charge for unarranged overdrafts. The FCA has announced new proposals designed to protect millions of people who use overdrafts and high-cost credit. But why? And what does this mean for you?

Overdrafts are a vital safety net, allowing people to ride out unexpected expenses and survive on a tight budget.

However, what began as an emergency measure, designed to cushion the blow of going a little beyond your means, has become the norm for many people. In December 2017, debt charity StepChange’s Stuck in the Red published a report which found that over two million people in the UK were stuck permanently in their overdrafts in 2016.

With more than 40 per cent of Britons struggling to make ends meet financially, this should come as no surprise. What is surprising, though, is that banks are taking advantage of this situation, charging large overdraft fees that, in some cases, are more expensive than short-term loans. Thankfully, help is at hand, with the Financial Conduct Authority (FCA) having recently completed a review of high-cost credit and now in a position to make real changes to how banks operate overdrafts.

Among the review’s findings was the fact that, in 2016, financial firms made around £2.3bn from overdrafts, with 30 per cent of that coming from Unarranged Overdraft Fees. On top of this, the review also found that just 1.5 per cent of customers are responsible for paying the majority of unarranged overdraft fees, at an average of £450 a year per person.

Turning the tide

As a result of these findings, the FCA has announced new proposals that it believes will save customers up to £140m a year.

These include:

• Mobile alerts warning people about potential overdraft fees
• Stopping banks from counting overdrafts in your ‘available funds’
• Online tools to check if you’re eligible for an overdraft
• Making it clear that overdrafts are a type of credit

Warnings could give you a head start, helping you to avoid accidental fees by moving money around or getting some cash from a different source. At the same time, making it clear that overdrafts count as credit, rather than available funds, should help remind everyone to avoid going overdrawn when they can.

The FCA is also considering a cap on the fees banks can charge for an unarranged overdraft. This will probably be £24 a month for every £100 borrowed. If the cap does come in, customers could save as much as £233m a year, according to Shadow Chancellor John McDonnell.

Sensible precautions

Right now, the most important thing to remember is that these changes have not come into force yet.

Some banks, including Barclays and Lloyds, have started cutting or scrapping fees for unarranged overdrafts, but your bank or account type might still have charges in place for some time to come. Fortunately, if you’re likely to go into the red and need a cash boost soon, there are a number of options that can help you avoid an unarranged overdraft and keep control of your finances:

• A short-term loan can be an option, but make sure it’s the right choice for you – our handy checklist could help
• Arranging an overdraft facility with your bank, or increasing an existing one, could be a good choice for small amounts
• Your credit card might offer a better rate than an overdraft, but make sure you’ll be able to pay off the balance quickly
• Before things get bad, shop around for a bank that will give you a competitive arranged overdraft, and capped fees for an unarranged one
• Use a budgeting app to stay on top of your finances and within your means as much as possible

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