Banks will have to develop PFM tools under FCA high-cost credit reforms

Banks will have to develop PFM tools under FCA high-cost credit reforms

UK banks will be forced to develop develop alerts for customers who may be about to slip into the red as well as a range of prompts and PFM tools that make it easier to keep on top of finances following a review by the Financial Conduct Authority into the high-cost credit market.

The watchdog says it is proposing a number of "radical" options to protect millions of people who use overdrafts and high-cost credit.

Andrew Bailey, FCA chief executive says: “High-cost credit is used by over three million consumers in the UK, some of who are the most vulnerable in society. The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer."

The watchdog believes that the way banks operate and charge for overdrafts needs "fundamental reform". In 2016 firms made an estimated £2.3bn in revenue from overdrafts; 30% of this was from unarranged overdrafts. The majority of unarranged overdraft charges are paid by only 1.5% of customers, who pay around £450 per year in fees and charges, efffectively subsidising the cost of providing free in-credit current accounts for the wider market.

In a move that will be seen as a boon to app-based personal finance startups, the FCA is consulting on a series of 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; and
  • making it clear overdrafts are credit or borrowing.

Says Bailey: “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.”

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