Evaluation Paper 23/1: An evaluation of our 2019 overdrafts intervention

Three and a half years after the implementation of final rules regarding the general pricing of overdrafts and regarding strategies on repeat use overdrafts, the Financial Conduct Authority (FCA) has published an evaluation paper (EP23-1) examining and presenting the effects of the final rules on overdraft prices.
To recall, the – back then – new rules
– prohibit the charging of higher prices for unarranged versus arranged overdrafts,
– ban fixed fees for borrowing through an overdraft (not including „refused payment fees“);
– require a simple design of the fee structure for overdrafts with no fixed daily or monthly charges and a single interest rate;
– extend the ban on fixed fees to include overdraft facility fees for arranged overdrafts up to £10,000;
– require firms to advertise arranged overdraft prices in a standard way, including requiring a representative Annual Percentage Rate (APR) to help customers compare them against other products; and
– require banks to do more to identify customers who are showing signs of financial strain or are in financial difficulty, and to develop and implement a strategy to reduce repeat use of overdrafts.
Having examined a large set of transaction data on overdrafts for the period between May 2018 and September 2021, the FCA found the following:
– Overall, the prices of overdrafts fell, although the decrease was not as much as predicted;
– Customers with a lower Index of Multiple Deprivation (IMD) as a proxy for vulnerability tended to benefit more than those with a higher IMD;
– Generally, no customer – regardless of the IMD – incurred charges that were higher than they would have been without intervention;
– The effective price of borrowing fell since the intervention;
– The volume of overdraft borrowing fell as well and so did the costs for repeat users of overdrafts;
– The repeat use strategy of lenders for borrowers frequently relying on overdrafts seems to have brought significant effects upon the amount of fees such borrowers incurred, although there was a large variance on the results among lenders.
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Based on these findings, the FCA concludes that the intervention measures work effectively and setting limits on prices and charges may be a feasible measure to protect consumers from harm.