On Thursday the Financial Conduct Authority published its review of high-cost credit and has outlined a number of key areas which will see UK banks having to develop technology to help customers at risk of slipping into debt, as well as a range of financial management tools to make it easier to keep on top of finances.
These changes are wide-ranging and some specific proposals are being consulted on from today. In addition, the FCA will gather additional evidence and carry out further analysis before any formal decisions can be made on a number of other issues.
‘High-cost credit is used by over three million consumers in the UK, some of who are the most vulnerable in society. Today we have proposed a significant package of reforms to ensure they are better protected including the possibility of a cap on rent-to-own lending.
‘The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer.
‘Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping in to an overdraft in the first place. However, we believe more fundamental change is needed in the way banks charge customers for overdrafts. Given the size of the market our work here will be completed as part of our wider review into retail banking.’ – Andrew Bailey, Chief Executive of the Financial Conduct Authority
Incoming Financial Technology Requirements for Overdrafts
In 2016 firms made an estimated £2.3 billion in revenue from overdrafts – 30 per cent of which was from unarranged overdrafts. The majority of unarranged overdraft charges are paid by only 1.5 per cent of customers, who pay around £450 per year in fees and charges, effectively subsidising the cost of providing free current accounts for the wider market.
The FCA is putting forward some immediate proposals today for overdrafts that it believes will save customers up to £140 million a year. Beyond that, the FCA will consider more radical options to ban fixed fees and end the distinctions around unarranged overdraft prices.
If appropriate, these options will be consulted on later this year to coincide with the wider Strategic Review into Retail Banking so that the FCA is able to take into account the part that overdrafts play in the current UK banking model.
The FCA is also consulting on mandatory rules to make it easier for customers to manage their accounts. These include:
- mobile alerts warning of potential overdraft charges
- stopping the inclusion of overdrafts in the term ‘available funds’
- requiring online tools to make the cost of overdrafts clearer
- introducing online tools to assess eligibility for overdrafts
- making it clear overdrafts are credit or borrowing
The proposals may be seen as an opportunity for the various FinTech firms which have developed personal finance apps, as well as those developing similar tools under the recent Open Banking changes.
Good News All Round
The changes are designed to help customers, particularly those most at risk from entering a debt spiral that can have devastating effect on themselves and those around them. Progressive FinTech firms are in the ideal position to react quickly and develop the technologies which are going to be required. This will produce a real boost to those firms who react quickest to the incoming legislation and develop the next level of apps and services.