New overdraft rules come into force today: what to expect
New rules designed to make overdrafts easier to manage have come into force from today, Wednesday 18 December 2019.
The changes have been brought in by the Financial Conduct Authority (FCA) and mean that a person’s ‘available balance’ or ‘available funds’ can no longer include their overdraft.
The new measures make it clearer that overdrafts are a form of credit, rather than a customer’s own money, and aim to help tackle confusion that may lead people to accidentally dip into their overdraft.
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The changes are part of a wide-ranging shake-up of overdrafts, which will also see new pricing rules introduced from 6 April 2020.
From that date forward, banks and building societies will no longer be able to charge higher prices for unarranged overdrafts than they do for arranged overdrafts.
Fixed fees for borrowing through an overdraft will also be banned from next year.
When the new pricing rules come into force, banks and building societies will be required to advertise arranged overdraft prices with an annual percentage rate to help customers compare them against other products.
Single overdraft charges
Some providers have already announced new single overdraft charges in preparation to comply with the rules set to come into force next year.
In November, Nationwide Building Society introduced a blanket rate of 39.9 per cent across its adult current account range, while HSBC First Direct and M&S Bank will impose the same rate from 14 March 2020.
The changes mean that those who stick within their authorised limit, but spend longer periods being heavily overdrawn, could find they will pay more in charges.
Meanwhile, those who sometimes dip into an unauthorised overdraft, or who do not go overdrawn very often or by very much, may find they end up paying less.
The FCA expects to see the cost of borrowing £100 through an unarranged overdraft fall from a typical £5 per day, to less than 10p per day.
A typical arranged overdraft user uses it to borrow less than £250 for seven days each month.
The charges from mainstream banks and building societies for this type of overdraft - before the FCA’s intervention - ranged from just over 80p per month to just under £7 per month.
Better for customers?
The changes come as the complexity of different banks’ overdraft charging structures has made it difficult for customers to understand how much they would have to pay.
When the new rules come into force, a £350 overdraft over seven days could cost around £1.65, assuming the bank prices the interest rate at 39.9 per cent.
If a customer uses a £1,000 arranged overdraft all month, and an unarranged overdraft of £100 for five days, they could be charged around £40 to £60 per month by some providers.
However, if the bank or building society charges at 39.9 per cent, this would cost around £30.
From July 2020, the FCA will also require firms to publish a range of overdraft pricing details to highlight the charges people are paying.