Why do un approved overdrafts need to be the same cost as approved ones?

[Zak33]

I'm confused so surely I have miss read and miss heard the news today.

Currently, if and when I use my overdraft I get charged an amount. I actually get a short term "free period" in case I screw up something and can get the money in there in time. I think many people have that.

If I go past my overdraft limit, I get charged a mugh higher rate. I#ve always seen that as sensible.... trhe bank doesn't want to lend me any more dough, so I get whacked hard if I stray into it.

If I understand the news today
https://www.bbc.co.uk/news/business-46590724

What is the regulator suggesting?

The overdraft system would be overhauled, in what the FCA calls the "biggest intervention in the overdraft market for a generation".
Instead of arranged and unarranged overdrafts, the regulator is proposing a simple, single interest rate for customers going into an overdraft.
There would no longer be any monthly or daily fees - like the ones charged to **example client**
Under the plans, banks would have to advertise their overdraft rate as a single annual interest rate, or APR. They would also be encouraged to explain that cost in pounds and pence.

I've never found it hard to see my overdraft fees.
But I also don't see why I should be allowed to borrow more than I've been permitted for the same price.

I Mudt have this upsidedown... anyone care to explain. What have I misunderstood?

more links
https://www.moneysavingexpert.com/ne...-to-be-banned/

Fixed daily and monthly overdraft fees are set to be banned as part of a package of reforms proposed today by the financial regulator.

The Financial Conduct Authority (FCA) says the price for each overdraft should be a simple, single interest rate, and so an unarranged overdraft – one that isn't agreed with your bank before you go into it – should not cost more than an arranged overdraft. This is just one of a number of planned measures following its review into high-cost credit.

[MrRockliffe]

I agree - surely it will encourage people to use their overdraft, which isn't a good thing.

I've got a free overdraft up to 1.5K, and I find it very difficult to get out of it once I'm in :/

[badass]

I personally prefer the financially incompetent to subsidise my banking. If I was running a bank I'd just have a fixed overdraft where below x value the interest is a and above that value the interest is a+b

If you don't like being charged a+b on any amount, pay me a visit and we will go through your finances and determine that you can afford an overdraft of more than x currently is then I will increase the value of x.

The beauty of this system is that if you momentarily go into the unauthorised overdraft, as long as you cover it quickly, the interest will be very little. Daily fees and the rest always were a load of rubbish.

What they really need to also do is provide accounts where payment is simply blocked when the balance goes below zero or the overdraft limit.

[Ttaskmaster]

What they really need to also do is provide accounts where payment is simply blocked when the balance goes below zero or the overdraft limit.

^ This.
TBH, I thought that's how it always did work, until BT pulled a fast one on their disjointed billing and were able to force a (miscalculated, I might add) payment out of my account and land me with additional fees.

However, it is easily done - In this modern age, payments can be taken from your account nigh-on instantly, yet some shops (b&m and online)seem to hold off actually processing payments for days or even weeks after the transaction. So, people who think they're being careful and check their balance before purchases still get caught out by these delayed payments that unexpectedly arrive to push them over limits.

[Zak33]

but have I read it right?

Are we going to see all overdrafts with a set interest charge.... and no penalty for going over it?

I assume then that overdrafts will be set in stone at an amount (per person) and blocked to go any further no matter what? Because if not, then it's a potentially WORSE situation for the 1.5% of people who use them.. it just got cheaper and they will use them, right?

[Smudger]

trhe bank doesn't want to lend me any more dough, so I get whacked hard if I stray into it.

The bank does want to lend you more dough, precisely so they can whack you with huge charges for doing so.

[Zak33]

The bank does want to lend you more dough, precisely so they can whack you with huge charges for doing so.

but is that actually true?

if they wanted to lend me more, I'd get the offer of an increased OD and then use it all the time, earning them more money long term.

But lets assume you're right and they want me to use more than they "approved" and want me to stray into it... will this new system be good for everyone?

The majority of unarranged overdraft charges are paid by only 1.5% of customers. They pay about £450 a year in fees and charges, according to the FCA.

so everyone else needs to pay more to cover the banks restricted income from the 1.5% - is that what this means?

[Ttaskmaster]

Are we going to see all overdrafts with a set interest charge.... and no penalty for going over it?

I think so....

I assume then that overdrafts will be set in stone at an amount (per person) and blocked to go any further no matter what?

I'd also presume authorised overdraft fees will increase by a notable amount, to cover the shortfall...

Because if not, then it's a potentially WORSE situation for the 1.5% of people who use them.. it just got cheaper and they will use them, right?

It could always be worse.
Abbey National were one of those that charged fees for being overdrawn, then charged fees for not having enough money in the account to cover payment of the first fees, then charged for not having enough money in the account to cover payment of the second fees, then charged for not having enough money in the account to cover payment of the third fees, etc etc...

if they wanted to lend me more, I'd get the offer of an increased OD and then use it all the time, earning them more money long term.

You may well get one... with corresponding interest rates for using it, thus earning them more money.

[Zak33]

You may well get one... with corresponding interest rates for using it, thus earning them more money.

exactly..so why not just do that?
Why do we need a set price for all overdrafts?

Morevoer surely over drafts, like any loan are subject to credit rating? So how the hell will that work?

how will a punter shop around for a better overdraft, even without daily charges, admin etc... if they have a different credit rating to the next bloke?

[Ttaskmaster]

exactly..so why not just do that?
Why do we need a set price for all overdrafts?

I imagine use of unauthorised overdrafts will just result in other, more severe penalties, like account closure...

[peterb]

Or you go to a system where the overdraft rate is individual to each customer.

Poor credit history - "Thank you, 25% and £100 limit - hit that and we'll stop making any payments from your account and increase your interest rate to 35%"

Good credit history - "Thank you, 10% and a £200 limit - hit that and we'll stop any payments from your account and increase your interest rate to 20%"

Or something along those lines.

[jim]

I'm confused so surely I have miss read and miss heard the news today.

Currently, if and when I use my overdraft I get charged an amount. I actually get a short term "free period" in case I screw up something and can get the money in there in time. I think many people have that.

If I go past my overdraft limit, I get charged a mugh higher rate. I#ve always seen that as sensible.... trhe bank doesn't want to lend me any more dough, so I get whacked hard if I stray into it.

If I understand the news today
https://www.bbc.co.uk/news/business-46590724



I've never found it hard to see my overdraft fees.
But I also don't see why I should be allowed to borrow more than I've been permitted for the same price.

I Mudt have this upsidedown... anyone care to explain. What have I misunderstood?

more links
https://www.moneysavingexpert.com/ne...-to-be-banned/

NB: I haven't read the consultation paper, just the opening, but below is my interpretation.

In general, the current regulatory position is that charges to customers should be indicative of the actual cost to the provider. So you shouldn't be offering a free bank account on the basis that the only way it can be funded is by charging double what it actually costs for a chequebook. Or cash withdrawals. Or, indeed, overdrafts. We had a very similar situation recently with the EU laws on interchange fees.

What the FCA is saying is that banks have one rate for arranged overdrafts, and then something much higher for unarranged, which does not represent their actual costs. This is in most part because the latter is completely under the control of the bank. They could just reject the payments that would take the account past the overdraft limit, but instead they often choose to accept the transaction and then sting the user with huge fees for having done so. Of course, they can then lock the account. So you might have a £1k arranged overdraft, costing £1 per day, and then a direct debit takes you into £1.2k, which is now unarranged overdraft, and the fee is suddenly £5 per day. Had they rejected the transaction, you would not have had to pay the fee. So I think that's the problem.

If the FCA forces banks to use one rate for both arranged and unarranged overdrafts, I think we'll see a situation where people have to shop around if they reach their limit. By that, I mean that rather than just letting the transaction go through, the banks will think, "No, our limit of comfort is £1k, so we won't let them have any more credit than £1k". At that point the customer could choose a credit card, or a payday loan, or whatever they like to meet that funding requirement. I think that is the goal. Bear in mind that even unarranged overdrafts are not limited, so this will just prevent there from being a two-tier system.

Secondly, they will force all banks to use the same terminology. This is pretty standard. So for credit cards you must communicate the APR, and for savings accounts you must communicate the AER. This prevents a nightmare situation where one account provider states daily interest, another states monthly, another gives you top ups, and you are completely unable to compare them. Consider for example someone who has an account at £0, and a £1 direct debit goes out. The bank charges them £5 per day on this, and it takes the customer a month to notice. For the sake of £1 borrowing, they have paid £150, which is an insane amount of interest (were it to be converted to an APR).

Consequently, if we're going to achieve the competition that I mentioned earlier, then the best way to do that is to have a system that is directly comparable with credit cards, loans (both long-term and payday). It seems to the FCA that customers are in some cases really paying over the odds for overdrafts relative to other types of debt, and therefore are obliged to respond with appropriate regulation.

Also to note is that this is a consultation, so the banks will go back and forth a fair bit on this before any final decisions are made.

[Butcher]

I don't see why this will usher in unfettered borrowing. My current account has no arranged overdraft and if I don't have enough money they just bounce payments. So I don't have an unarranged overdraft either. The idea that the banks will just blank cheque any amount of unarranged borrowing is crazy.

[kalniel]

I don't see why this will usher in unfettered borrowing. My current account has no arranged overdraft and if I don't have enough money they just bounce payments.

Have you tried? I used to think that was the case, having very specifically asked for an account with NO overdraft. But when a bank error by them caused an outgoing payment to be made before an incoming I was temporarily overdrawn (not even for a whole day) and incurred fees for doing so.

[scaryjim]

... If I go past my overdraft limit, I get charged a mugh higher rate. I#ve always seen that as sensible.... trhe bank doesn't want to lend me any more dough, so I get whacked hard if I stray into it. ...

If the bank didn't want to lend you more dough they could refuse the payments. They choose not to ... then drop huge daily charges on you because they decided to let you go over your limit.

There's plenty of reasons under the FCA's remit they'd want to look more closely at that practice. Most likely, it's to encourage banks to stop letting customers go over their limits. Since the monthly charges for doing so can often be larger than the initial debt itself, it's particularly unsustainable and leads to debts that can never be repaid as the customers can't afford to cover both the charges and the debt.

Basically, it's got "target for FCA intervention" painted all over it.

[Corky34]

I got caught once by a mistake and a bank allowing a payment to take me into overdraft territory, I'm talking about 30 odd years ago and a piddling amount, under £5, but because i was new to the world of work, banks, direct debits, charges, and all that i ended up with something like £100-150 debt before payday came around.

In those days it would be a week or more before you'd get a letter in the post and being young pride often stops you from asking the bank of mum & dad for £100, you live and learn i guess but it was a harsh lesson.