The FCA’s changes to overdrafts and high cost credit

The FCA recently published two Consultation Papers (CPs); CP18/42 which proposes changes to overdraft regulation; and CP18/43 which proposes changes to the regulation of various high cost credit products.

Attention has focussed, in particular, on the proposed changes to overdrafts, which would:

• end the distinction between arranged and unarranged overdrafts;
• stop firms charging fixed fees for overdrafts; and
• require firms to apply APR pricing to their overdrafts.

This blog summarises the package of changes proposed in the two CPs and explores their potential implications for firms.

Overdrafts

The FCA’s proposed interventions are intended to address the harm to consumers the FCA has identified in the market, especially to those consumers who are likely to be more vulnerable.

Notably, having previously discussed the possibility of introducing a price cap, the FCA now says that it does not think a price cap would fix the problems it has identified in the overdraft market. The FCA is concerned that firms would tend to cluster their pricing around any cap, and that this could prompt certain providers to raise prices, as well as limiting effective competition between overdraft providers. However, the FCA says it will continue to monitor the market and will consider introducing a price cap if it sees persistent consumer harm from overdraft pricing.

The key source of harm to consumers identified by the FCA is the “disproportionate burden of high charges from the repeat use of overdrafts.” The FCA is particularly concerned that overdraft fees and charges tend to fall very heavily on a small number of consumers, noting that, in 2016, more than 50% of firms’ revenues from unarranged overdraft fees and charges came from 1.5% of consumers. The FCA goes on to note that people living in deprived areas are more likely to pay overdraft fees than those living in more affluent communities, and that overdrafts can often be many multiples more expensive than a payday loan, a product, notably, on which the FCA had already intervened to cap prices.

Accordingly, the FCAs interventions are intended to change the way banks and others charge for overdrafts in order to address the high burden that overdraft fees and charges can have on this small group of vulnerable, lower income consumers.

The FCA is consulting on the following interventions in the overdraft market, with the consultation closing on 18 March 2019:

• banning fixed fees for borrowing through overdrafts. This will not apply to refused payment fees, which firms are allowed to charge under the Payment Services Regulations 2017;
• stopping firms charging higher prices for unarranged overdrafts compared to arranged overdrafts;
• overdraft prices to be displayed as a single interest rate, with no fixed daily or monthly charges;
• requiring arranged overdraft prices to be advertised in a standardised way, with an APR, to enable consumers to compare the costs of overdrafts directly to other borrowing products;
• new guidance on refused payment fees, making clear that these should be clearly linked to the costs of refusing payments; and
• requiring overdraft providers to identify those consumers who are in financial strain or difficulty through repeat overdraft use, and to help these consumers reduce their use of overdrafts.

High cost credit products

The FCA has also published final rules and guidance related to home-collected credit, catalogue credit and store cards, and is also consulting on a further package of remedies for Buy Now Pay Later (BNPL) offers.

As with the overdraft market, the FCA says that it has found consumer harm in the high cost credit market, and that many high cost credit customers are more likely to be vulnerable.

For home collected credit, the FCA has finalised the guidance which it previously published. This sets out its expectations of firms as to how they can comply with the Consumer Credit Act’s requirements only to solicit cash loans off trade premises (for example, at someone’s home) where this is done by a specific previous written request from the customer. It has also made new rules on guidance for firms to explain to customers the comparative costs of refinancing an existing loan versus taking out a new one.

For catalogue credit and store cards, the FCA is will now:

• require firms to explain to consumers the implications of not repaying by the end of the BNPL offer period, prior to entering a credit agreement;
• require firms to remind customers towards the end of their offer period to prompt these customers to repayment;
• extend rules on credit limit increases that already apply to credit and store cards to catalogue credit firms;
• require firms to identify customers at risk of, or in, financial difficulties, and to have appropriate policies in place to help these customers once identified; and
• require catalogue credit and store card firms to offer customers in persistent debt help to repay it more quickly.

The FCA is also consulting on measures to extend the first two rules above to all point of sale retail finance providers, and on two further measures; to introduce new guidance to firms offering BNPL offers, and to introduce a new rule that will apply to all firms offering BNPL offers, that they must not backdate interest on any amount of the initial sum repaid within the offer period.

The FCA has also finalised guidance to help Registered Social Landlords better understand the scope and application of consumer credit regulation when they are helping tenants find alternatives to high cost credit products.

The FCA requests any responses to the consultation part of the paper by 18 March 2019.

Implications for Firms

The above package of changes shows the importance and priority the FCA places on vulnerable consumers when deciding whether to intervene in markets, and to apply specific remedies. The requirement for firms to identify those who may be at risk of, or are in, persistent debt illustrates the sort of action the FCA now expects firms to take in respect of their vulnerable customers, the over-arching emphasis being on firms both identifying such customers and taking proactive steps to ensure they receive good outcomes.

The FCA’s changes to high cost credit products are essentially as expected, and should bring these products into line with credit cards which already have many similar rules.

It is notable that the FCA decided not to proceed with a price cap for overdrafts, instead opting for a wide set of disclosure related remedies, designed to improve customer understanding of the price they are paying for an overdraft. This shows that while the FCA is increasingly interested in the pricing of products and the distributional issues different pricing models can create, they are still reluctant to cap prices, unless other measures have been shown to be insufficient to tackle any identified harms, and it is clear that this will not lead to unintended consequences like price clustering.

Given the ban on fixed fees for overdrafts, many firms will need to change their overdraft and current account pricing models and communicate these changes with their customers in a timely manner. Boards and senior managers will need to exercise careful oversight over pricing to ensure that any changes to their firm’s overdraft and overall current account pricing model do not inadvertently end up penalising vulnerable consumers in other ways, e.g. through high refused payment fees. The FCA’s proposed guidance for such fees shows that they are watching closely for any unintended consequences that might flow from their interventions.

Finally, it is important not to lose sight of the fact that a price cap remains on the table as a possible option if the FCA does not see sufficient and timely changes to the way the overdraft market operates.