Overdraft repeat use: good practice and areas of concern

Following the review of overdraft strategies of financial institutions and payment service providers earlier this year, the Financial Conduct Authority, FCA, has published some good practice and areas of concern as regards such strategies. To recall, the FCA’s policy statement (PS19/16) requires such firms to identify customers with a frequent use of overdrafts and develop a strategy to help these customers to reduce their overdraft balances and overall borrowing costs. In view of the coming into force of the new consumer duty (PS22/9), the implementation of such strategies has become even more urgent. Therefore, the FCA is now publishing these „good practices and areas of concern“ as regards the following; please note that we only focus on the good practices. For the areas of concern, please refer to the original statement of the FCA:
(1) The identification of customers with a frequent use of overdrafts or with financial difficulty: In this context, the FCA deems good practices to be those where policies and procedures are in place to identify such customers and where different sources of information are relied upon to determine the status of „frequent overdraft users or customers in financial difficulty“ (e.g. missed payments, or account transaction data). Additionally, some firms are regularly reviewing their identification approach to ensure it stays fit for purpose.
(2) the communication with affected customers and the collection of further information to develop an adequate customer-focused strategy: In this context, the FCA finds that customers should be approached using various means of communications such as e-mail, phone calls, or in-app messaging. Additionally, and quite to the delight of the authority, the FCA found some firms using highly sophisticated customer research to adjust their methods and the frequency of customer communication to the balance and amounts of overdraft charges. Furthermore, the FCA notes that some firms even adjusted the content of the messages to make the customer aware of how much money he or she has been charged and how such charges could be reduced, if getting in contact with the institution.
(3) the implementation of customer-focused measures to help reduce overdraft balances and borrowing costs: The FCA notes that financial institutions and payment service providers may use a variety of measures to effect a better outcome for frequent overdraft users or customers in financial difficulty. These range from a reduction of the interest rate on overdrafts, to a waiver of interest and charges, to the offering of alternative loan arrangements. Firms with good practices often installed several of these measures, depending upon a customer and his or her particular needs. Some firms also offered dedicated websites to encourage customers to contact the companies and to get more information on the cost of overdrafts (e.g. by offering a tool to calculate overdraft charges).
(4) the evaluation of the effectiveness of the measures: In this context, the FCA particularly highlights the implementation of policies and procedures to monitor the effectiveness of the measures for individual customers (e.g. via comparison of before and after charges following the implementation). Some firms also have processes installed to provide regular reports on overdraft measures to senior personnel who is responsible for this business area. Others regularly reviewed the measures and drove for solutions that could better the situation of a customer.
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As these are only the key „good practices“ outlined in the document, please refer to the original FCA statement for more detailed, comprehensive information.