The FCA has announced new overdraft rules that will require firms to charge a simple annual interest rate – without additional fees or charges for using an overdraft – which the regulator suggests will mean seven out of 10 people will be better off or at least see no change.

Around 14 million people use an unarranged overdraft each year, according to the FCA, and the regulator said that all of these users will be better off or see no change when the rules come into force in April.

The FCA highlighted that unarranged overdraft prices have regularly been 10 times – and for some consumers as much as 20 times – as high as for payday loans, and that customers at some large banks had been charged effective arranged overdraft rates in excess of 80% per year once fees and charges were factored in.

When the new rules are enforced, the FCA suggested it will mean that headline interest rates will increase, but the cost of borrowing will have gone down or remained unchanged for most people.

The regulator added it will also be easier for consumers to understand what they’re paying, and to compare overdrafts between different providers and different forms of credit. FCA research had previously found that 4 out of 5 overdraft users couldn’t work out which of a range of overdraft models was the cheapest.

“Our changes expose the true cost of an overdraft,” FCA executive director of strategy and competition, Christopher Woolard, commented. “We have eliminated high prices for unarranged overdrafts. This will result in a fairer distribution of charges, helping vulnerable consumers, who were disproportionately hit by high unarranged overdraft charges, and many people who use their overdraft from time-to-time.

“Overdrafts were not designed to be used for large amounts for long periods of time. Consumers should consider other methods of credit if they find they need to borrow for longer.

“In addition to this, we have made it clear that firms have to treat all customers who are affected by changes to their charging structures fairly. In particular, firms must identify customers adversely impacted and take steps to support them if they’re in difficulty.”

Commenting on the FCA’s announcement, Hargreaves Lansdown personal finance analyst, Sarah Coles, said: “Borrowers with large, arranged overdrafts, are already paying through the nose for their borrowing, but the new rules could see their rates double. It’s going to be very difficult to persuade them that the FCA’s overdraft reforms are good news for borrowers.

“If you’re in this position, you should ditch your overdraft well before the charges hit. Consider carefully how you can start to pay the balance down, and while you’re clearing the debt, take steps to move it somewhere it’s not going to cost you an eye watering 39.9% in interest.”

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