The Financial Conduct Authority (FCA) has recently released the findings of its review into the high-cost credit market and they have considered banning charges for unauthorised bank overdrafts. They feel that the charges levied on those who go overdrawn and don’t have an agreement in place are high and complex.
In its review, the FCA said; “We believe there is a case to consider fundamental reform of unarranged overdrafts, and whether they should have a place in any modern banking market… Maintaining the status quo is not an option,”
As Barclays have already stopped all unauthorised lending and Lloyds have announced that they will be scrapping unarranged overdraft fees from November, it seems like the banking sector is moving away from overdrafts anyway.
However, currently those banks which do charge overdraft fees charge around £6 a day or up to £90 a month. These fees have been described by FCA chief executive Andrew Bailey as significantly higher than the fees associated with payday loans.
Although a ban on unarranged overdrafts is being considered, it is not the only option available as the FCA could demand affordability checks before the bank lends money on an unplanned basis or a cap on charges could be imposed. However, the Competition and Markets Authority (CMA) decided against a cap last year so this may not be the option the FCA chooses.
Despite the FCA’s comments, the banking industry said that customers are usually warned if they are about to go overdrawn usually via a text alert on their mobile app. Head of personal finance at UK Finance, Eric Leenders, said; “When used sustainably, consumer credit is important for economic growth, and lenders work hard to ensure the balance is right between helping customers to borrow while ensuring longer term affordability.”
In its review, the FCA also raised concerns about the rent-to-own market for goods including fridges, TVs and furniture and the effects of motor finance such as personal contract purchase (PCP) agreements.
The FCA have called the rent-to-own market a sizeable issue as people are typically paying three or four times more for their goods than if they had the cash to buy it outright. As a result, they suggested that housing associations could provide these goods instead on a more beneficial finance agreement for the consumer.
Motor finance has come under fire recently from the Bank of England and it seems that the FCA are equally worried about PCP arrangements. Further research and analysis is being done into the transparency of the terms of these agreements whilst they also look into the possibility of introducing affordability tests for this kind of lending.
Finally, the FCA looked into the payday loans cap as part of their review and they found that the cap, which was introduced in January 2015, has delivered ‘substantial benefits’ to consumers across the country.
Since the cap was introduced, no one borrowing money via a payday loan has had to pay more than 0.8% of the amount borrowed per day. It is thought that the cap has seen 760,000 borrowers save £150m a year and payday loan providers are also less likely to lend to those who cannot afford to repay meaning that debt charities have seen a fall in the number of people asking for their help with this kind of borrowing.
As personal debt continues to rise, changes to the personal lending market to make it fairer for consumers and protecting them for spiralling debt will be welcome by debt charities and consumer groups alike. The payday loans cap and the banning of unauthorised overdraft fees is a great start to help those struggling with debt and reliant on credit but whether any other changes come into effect remains to be seen.
References and further reading
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