Katie Evans, Head of Research and Policy, Money and Mental Health

A big step towards tackling the financial and psychological costs of overdrafts

7 June 2019

We’re delighted that today, after years of campaigning by Money and Mental Health and other charities, the Financial Conduct Authority (FCA), the body who regulate financial services in the UK, has today announced decisive action to drastically reduce the cost of overdraft borrowing.

Counting the costs of an overdraft

There can’t be many of us who have never accidentally ended up in our overdraft. A forgotten direct debit, a bill that was a bit higher than you expected, a bank holiday or a late pay day – all these things can push people into their overdraft unexpectedly. Experiencing a mental health problem can make it even easier to end up in an overdraft: symptoms such as memory problems can make managing money more difficult than usual and mean payments are forgotten, or increased impulsivity can result in spending slipping out of control.

Most of us will probably have been shocked by the charges that resulted from a simple mistake. In particular, if you don’t have an arranged overdraft with your bank, or if you exceed it, bank charges and interest fees for an unarranged overdraft can quickly escalate. If you’re living with a mental health problem, potentially with a reduced income, these charges can be even harder to manage.

And the psychological costs

High overdraft fees have psychological costs, as well as financial ones. Often the complexity of overdraft fees, combining fixed charges with interest rates varying according to how much is borrowed, can make it very difficult for people to understand why they are paying so much.

“I don’t understand the charges. I get a breakdown from my bank, but I can’t relate the daily/interest charges to my bank statement. So as I’m coming out of depression & managing my finances better I’m not sure how to keep charges to a minimum.”

When a £100 unarranged overdraft costs approximately £5 a day, plus high fees for any payments that are refused, debt can quickly spiral. We know this can leave people feeling trapped.

“I think it’s a huge amount of money, and when somebody gets into it, it escalates so fast that it’s out of all control. It’s driven me to the brink of suicide in the past.”

The good news

After years of analysis of the current account market and overdraft pricing, the FCA have today taken decisive action to limit the cost of overdraft borrowing. Their plan has three main points:

    1. Banks won’t be able to charge more for unarranged overdrafts than arranged overdrafts. This will mean that people who accidentally go into their overdraft, or over their arranged overdraft, won’t pay more than those who have organised a facility with the bank. In the past unauthorised overdrafts were significantly more expensive.
    2. Fixed fees for overdraft borrowing – either daily or monthly fixed charges for borrowing or having an overdraft facility – have been banned. These charges were particularly excessive when people only borrowed a very small amount. The new changes announced today will mean that charges will more accurately reflect how much a person borrows, and how long they use their overdraft for.
    3. Banks can only price their overdrafts using a simple, annual interest rate. This should help cut through the existing confusion about overdraft pricing and help people understand exactly how much they pay for overdraft borrowing. We’re particularly pleased, given the difficulties some people experiencing mental health problems can face processing information, that this information is going to be presented in pounds and pence alongside the interest rate

These changes should make a substantial difference for people with mental health problems who rely on overdraft borrowing to make ends meet or struggle with financial management while unwell. The FCA is also  expecting banks to do more to identify customers who are repeatedly using their overdraft, and to offer help.

Things to watch for

While this is good news, we will have to watch the interest rates banks set for overdraft borrowing carefully. While the move away from fixed fees should have a dramatic impact on the cost of overdraft borrowing, the fact that banks can no longer charge more for unauthorised borrowing may lead them to increase overdraft interest rates, to recoup some of their lost income. The FCA will have to keep a close eye to check these changes are working in line with other steps announced in December that aim to increase the competitiveness of this market, and aren’t becoming excessive.

We also need to be aware of the limitations of these actions. It’s great that banks will have to do more to identify customers who are struggling financially. But when this is a result of broader issues like problems with the benefits system or inadequate sick pay, there’s a limited amount that banks can do to help – wider systemic changes are needed. We’re pleased the FCA is being proactive, but we also need the government to step up and deal with the underlying causes of poverty related to poor mental health which mean people need to borrow to get by.