Overdrafts and 'buy now pay later'

Our responses to the Financial Conduct Authority's (FCA) consultation on overdrafts and 'buy now pay later' offers

The FCA has consulted on overdraft charge reforms and measures to make 'buy now pay later' (BNPL) offers clearer to consumers. Here are our responses for both calls for evidence.

Our response to FCA consultation paper CP18/42 – overdrafts

The Financial Conduct Authority has consulted on a set of measures to reform overdraft charges. The measures will require banks to:

• Align authorised and unauthorised overdraft fees, banning the current practice of charging excessively high unauthorised fees.
• Charge for overdrafts using a single interest rate expressed in APR, replacing the current complex charging models.
• Identify repeat overdraft users who are in financial difficulty and provide support and/or forbearance to address and safely reduce overdraft debt.

We welcome the FCA’s proposals, which will significantly reduce overdraft costs for people in financial difficulty and ensure more people struggling with debt get help at an earlier stage. We've highlighted that:

1. Banks may charge different customers a different interest rate, leading to an increase in ‘risk-based’ pricing for overdrafts. In the long-run, this could lead to a re-emergence of a concentration of high charges on more vulnerable groups.
2. There remains a case for an overdraft price cap to prevent people in financial difficulty from accumulating high costs from a product that's designed for short-term use. The FCA has committed to keep the case for a cap under review and we've urged the regulator to conduct a detailed distributional analysis of the impact of the new measures to inform this work.
3. The evidence the FCA has collected indicates that firms haven't been treating customers fairly: the concentration of unauthorised overdraft fees on financially vulnerable groups suggests banks have failed to take adequate steps to identify customers in difficulty or support those they know to be in difficulty, instead continuing to charge excessive fees. The FCA should now use its powers to establish a redress scheme for those who've been charged overdraft fees inappropriately.
4. The FCA’s proposals to require banks to identify and support repeat overdraft users lean too heavily on the discretion of firms and provide little clarity or transparency for customers. This could lead to a failure to significantly change the present situation where banks often intervene late to support people in difficulty. The FCA can address this issue by tightening the rules that define repeat use and requiring banks to publish information on their repeat use policy.

Download our overdrafts response

Our response to FCA consultation paper CP18/43 – 'buy now pay later'

The FCA has also consulted on measures to help consumers better understand BNPL offers and repay within the offer period. We support the FCA’s measures but argue that:

1. Firms shouldn't be able to use the term ‘buy now pay later’ to market credit products that carry interest during the offer period. Firms should instead use standard credit terms, which will help consumers understand they are purchasing a credit product.
2. Where firms do market BNPL products, they shouldn't be able to backdate any interest during the offer period.
3. The FCA should revisit the voluntary industry agreement under which retail firms agreed to stop linking discounts and incentives to store cards, to reduce the risk of inappropriate borrowing by those who are financially vulnerable in pressured retail contexts. The agreement has been ineffective in changing marketing practices for store cards and running catalogue credit, which continue to be offered with BNPL offers and discounts.

Download our BNPL response