While it is no longer news that there are drastic changes in the banking industry, many people still don’t understand the basics of the changes. This is why this article breaks it down completely.
Banks in the UK have been charging customers exorbitantly for overdrafts and that has suddenly changed. Some of the banks in the UK charge a daily fee on overdraft while others charge a monthly fee. Some charge a particular percentage. In fact, their other banks that factor all the three into their calculation.
The problem with all of them is that they arrive at a huge figure that keeps consumers trapped in a vicious cycle of overdraft. A couple of days ago, the Financial Conduct Authority (FCA) announced a change that will take effect in April 2020. Here is the breakdown of the new overdraft regulation.
The regulation bans banks and building societies from charging higher fees for unarranged overdrafts than for arranged overdrafts. This simply means that arranged overdrafts should cost more than unarranged ones. Really, there is no convincing reason for the reverse that has been the norm for several years.
The regulation also bans banks from charging fixed fees for overdrafts. With this, banks are expected to stop charging fixed daily or monthly fee on money borrowed through overdraft. This will prevent the interest to overshoot the actual overdraft.
Banks and building societies should now give overdrafts at a simple annual interest rate. The implication of this rule is that the interest rate on the overdraft will be calculated using simple annual interest rate thereby bringing down the final figures.
It has also become mandatory for banks and building societies to advertise the prices of their arranged overdraft with an APR. That way, customers will be able to calculate it and compare it to other products. FCA must have realized how the calculations of overdraft charges are shrouded in secrecy. That’s why a lot of customers keep falling into the booby trap and finding it difficult to come out. Now, from April 2020, customers will be able to calculate the interest on any overdraft even before taking it. This regulation is meant to add some transparency to banks’ overdraft hocus-pocus.
From 2020, refused payment fees will also be commensurate to the costs of refusing payments. Most importantly, banks and building societies should try to identify customers that seem to have financial difficulties so as to help them design a payment plan to reduce their chances of getting trapped in the overdraft vicious cycle.
With these new rules, FCA has now cut down the excesses of UK banks and consumers can now heave a sigh of relief. While many people commend FCA for this great move, others believe that it is long overdue as banks have already made billions of pounds and impoverish a lot of consumers.
