Overdrafts are not good value for money, says FCA

http://www.theguardian.com/money/2014/apr/10/overdrafts-not-value-for-money-fca

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Consumers are not getting value for money from the UK's £8bn overdraft market and a significant number of people are paying too much when they go into the red, the City regulator has said.

Research by the Financial Conduct Authority found that customers were confused by the fees on accounts and often considered overdrafts as an extension of their income rather than as borrowing, in part because they were presented by providers as available funds.

As of July 2013, consumers owed a combined £8bn in overdrafts, of which the FCA estimated 90% were pre-arranged, which tends to attract lower charges than unauthorised debt.

However, repayments of debt tended to be driven by income coming in, rather than as scheduled payments to clear an outstanding balance, and using an arranged overdraft could quickly become habit, the regulator said.

The FCA warned banks and building societies that they could face new rules on overdraft charges after it found they were earning revenue from consumers' lack of understanding, confusion and limited attention, and had incentives in place to make money by increasing overdraft limits.

Of the 61m current accounts held in the UK, more than 30m have an overdraft facility, and in 2011 banks and building societies made £1.7bn, or a third of their current account revenue from people borrowing money in this way.

Overdraft charges were at the centre of a court battle between current account providers and the Office of Fair Trading which was won by the banks but put the level of charges under the spotlight.

More than four years on, the FCA said providers appeared to still be charging very high, complex and opaque fees for unauthorised overdrafts, the regulator said, and while voluntary measures such as text alerts for unarranged overdrafts had improved matters, many consumers were still paying too much.

Christopher Woolard, director of policy, risk and research, at the FCA, said: "Just about everybody who banks can have access to some sort of overdraft facility – whether they've signed up for it or not.

"The sheer size of this market is huge and with overdrafts bolted on to more than 30m UK current accounts, we want to make sure it is working well for consumers."

The FCA will now investigate how providers set and monitor overdraft limits.