Many consumers are paying too much for overdrafts

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The Financial Conduct Authority (FCA) has published research into the £8bn overdraft market a week after it took over responsibility for 50,000 consumer credit firms.

The findings show overdrafts still aren’t providing good value, with many consumers confused about the costs.

Christopher Woolard, Director of Policy, Risk and Research at the FCA, said: “Just about everybody who banks can have access to some sort of overdraft facility – whether they’ve signed up for it or not. The sheer size of this market is huge and with overdrafts bolted on to over 30 million UK current accounts, we want to make sure it is working well for consumers.”

The FCA looked at both arranged overdrafts, those that come as part of a current account package and unarranged overdrafts, where firms allow customers to go beyond their overdraft limit. The research shows that using an arranged overdraft can quickly become habit, with many consumers giving little thought to the actual cost of interest or fees. As consumers, we tend not to consider overdrafts when deciding on a current account and don’t switch on the basis of overdrafts, thus there is little pressure on banks to provide good value overdrafts.

Recent measures agreed between the industry, the Office of Fair Trading (OFT) and the Government, such as text alerts for unarranged overdrafts, have helped to improve things, but unarranged overdrafts still carry high charges and the terms set by banks can be so complex that even the most astute consumer could struggle to understand what they are paying for.

A number of banks have claimed that overdrafts subsidise ‘free’ current accounts, but personal current accounts also help banks to sell a range of more profitable products. One aspect of this is cash savings, which the FCA is currently exploring through a market study. The FCA will now investigate how providers set and monitor overdraft limits and their governance and strategies for doing so. As part of these next steps, the FCA will also consider making some voluntary measures mandatory in Autumn 2014.