The finance watchdog, the FCA, is under pressure from MPs and debt charities to put a cap on the interest charges and fees that can be charged on high-cost financial products, such as unarranged bank overdrafts.
On Thursday, May 31, the FCA will reach the end of an 18-month review into high-cost credit products, including overdrafts, rent-to-own, home-collected credit (doorstep loans), and catalogue credit.
Read: How do overdrafts work?
The interest rate on arranged credit – such as a personal loan or credit card – tends to range from about 5% to 25%. For an unarranged overdraft or doorstep loan, the effective interest rate can be 200% or more. Interest rates of up to 440% on unarranged overdrafts have been seen, says the FCA.
If a borrower is stuck with a very high interest rate, and they can only afford to pay off the interest and fees, they would never actually pay off the principal debt – they would just keep paying interest and fees forever.
Four years ago, the FCA put a cap payday loans: you can’t be charged more than 0.8% interest per day on the original loan, and the total amount repaid can’t be more than twice the initial loan amount. The cap was successful in reducing the amount of interest being paid by borrowers – and a number of payday loan companies have closed down.
Last month, the Labour party proposed that the watchdog extend the same cap to overdraft borrowing. John McDonnell, the shadow chancellor, said such a cap would save borrowers £233 million per year.
Debt charity StepChange estimates that up to 1.4 million people used high-cost credit last year to pay for essentials. “We urge the FCA to take emphatic, decisive action to reduce the harm caused by high-cost credit,” said the charity’s public policy advocate, Adam Butler.
The FCA has mostly kept its cards close to its chest ahead of the May 31 deadline, though it has previously warned that is considering “fundamental reform” of overdraft charges.
About 3.1 million used an unauthorised overdraft last year, says the FCA – but from the banks’ perspective, just 2% of all current accounts create more than half of the total revenue from unarranged overdraft charges.
“This review and the analysis we have conducted so far give an emerging picture of the need to intervene in some parts of the market,” said the FCA’s head of strategy and competition, Christopher Woolard. “At the same time we can also see the social utility of these credit products. We need to address both the choice and range available and how this market can work better for consumers.”
Even before the FCA has made an official ruling, the Financial Times reports that Barclays and Lloyds Banking Group have begun reducing their fees on unarranged overdrafts.
Cracking down on persistent debt
In April, the FCA announced new rules for credit card companies when dealing with customers with persistent credit card debt. The new measures mean that card issuers now need to help borrowers get out of debt – first by suspending the credit card, and then by cancelling fees and charges if the persistent debt remains. This will save between £310 million and £1.3 billion per year in credit card interest and charges, according to the FCA.
If you’re worried about debt, never pay for debt advice – it is freely available from the following debt charities: National Debtline; Citizens Advice Bureau; and StepChange Debt Charity, which has an online budgeting and debt tool which can help you get back on track. It provides free debt advice tailored to your personal circumstances via a 20 minute online questionnaire.