Charges for accidentally going into your overdraft may be outlawed, according to the Financial Conduct Authority (FCA). The regulator is considering banning unarranged overdraft fees, which penalise those who go into the red without prior consent of their bank to the tune of around £6 per day.
Barclays have already abolished these charges, while Lloyds will scrap them as of November.
"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," the FCA said in a report released today regarding the status of so-called high interest loans.
Barclays have already abolished the charges. Credit: PA
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High interest loans include payday lenders such as Wonga and The Money Shop as well as the so-called unauthorised loans, as the penalties for going into your overdraft are known. Rent to own retailers, which are used to purchase consumer goods, are also covered by the FCA.
According to Financial Consent Authority chief executive Andrew Bailey, "maintaining the status quo is not an option." The review found that the costs of going accidentally overdrawn were often more punishing - 'significantly higher', according to Bailey - than taking out a high APR loan with a payday lender.
Banks defended themselves by saying that they provide safeguards against going overdrawn, such as push notifications to customer's phones and text alerts.
"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," said a spokesman for UK finance, head of personal banking Eric Leenders.
Mr Bailey from the FCA also cast aspersions over rent to own loans, which allow financing for expensive consumer goods. "We think that is a sizeable issue, because people are paying three or four times more than if they used cash," he told the BBC.
Andrew Bailey of the FCA. Credit: PA
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Payday loan lenders have long been targeted by regulators and a cap was introduced in 2015 that limited lending to just 0.8 percent per day of the amount borrowed. The review published by the FCA that they had saved over three quarters of a million customers around £150 million ($197.7m) a year as a result of the change in law.
Payday lenders reported that they were less likely to lend to those in financially perilous situation and charities assisting those in debt have received fewer inquiries from people struggling with repayments.
Source: BBC