FCA to consider industry-wide overdraft cap

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This proposal was made by the Competition and Markets Authority (CMA) in August, when they decided that banks should be left to set Maximum Monthly Charges (MMCs) at their own discretion.

At the time, the CMA believed that leaving banks to set their own caps was the best option for stimulating competition, yet their refusal not to recommend an industry-level ceiling quickly came in for criticism.

This is why the FCA's announcement that they'll "undertake work on overdrafts" has raised hope they may end up strengthening the CMA's proposals and implementing a single cap that all banks must respect.

Yet so far they've provided no explicit assurance that they'll impose a cap, and even if they did, there still remains a genuine concern that such a cap might be counterproductive.

Protecting customers

And besides, they won't be announcing their proposals until 2018, since their investigation requires they "collect data in 2017".

This data will relate in particular to how overdraft charges and overdraft limits work, retreading much of the same ground that was covered by the CMA over the course of their two-year review.

Yet in contrast to the CMA, who are tasked almost exclusively with ensuring that markets are simply competitive, the FCA has a bigger remit.

Namely, they also have responsibility for protecting customers and making sure that markets work well for them.

This means they may very well end up making a decision on overdrafts that's more in the interests of customers than it is in fostering the highest level of competition between banks.

And for customers and consumer groups alike, this is very encouraging news, insofar as overdraft charges can be excessive in some cases.

For example, it was recently found that fees for unplanned overdrafts can sometimes be as much as 12 times higher than those for payday loans.

And in a separate inquiry by the Treasury Select Committee, it was also found that the charges imposed by banks for overdrafts are often too complex and confusing to compare in any meaningful way.

In fact, the criticisms the Treasury Committee had for the CMA's recent review and for overdraft fees in general suggests that the FCA may receive extra impetus to rule more in favour of customers.

In September, Committee member Rachel Reeves MP said, "The ball is now firmly in the FCA's court. It must step up to the challenge and take necessary action, for example by imposing a monthly maximum charge on overdrafts".

Given her and the Committee's urging of the FCA to set an industry-wide cap, there's a greater possibility that the FCA may do just that.

Conflicts

And in addition to overdrafts, the FCA will also be looking into the practicalities of forcing banks to "publish better, comparable information".

They'll also be researching the kind of prompts that will best encourage customers to consider the possibility of changing their banking arrangements, whether this takes the form of switching bank or switching to a different kind of account.

However, while the introduction of clearer information and regular prompts would most likely increase customer engagement with their bank accounts, there's a concern that an industry-wide cap on overdraft fees would have an opposite, conflicting effect.

Such a concern was expressed by the CMA themselves in their review [PDF], which argued that a "regulated upper limit might validate a particular level of cap, incentivising some banks to set
MMCs at the upper limit as opposed to competing down the level of MMC".

Put differently, their reasoning is that an industry-wide cap would simply be a green light to all banks to set their overdraft charges to the highest amount. By contrast, clearly stated limits set by each bank individually and an improved switching system would force them to compete to make their charges as low as possible.

This, at least, is the CMA's reasoning, and it's supported by a number of precedents.

For instance, when the Office for Fair Trading (OFT) imposed a £12 ceiling in 2006 on the penalties credit card providers could charge for missing or late payments, almost every bank began charging the full £12.

Still, it's for the FCA to look into the possible effects of an industry-level cap further, and even if they've made no promises about introducing one, their particular responsibilities and the pressure of MPs may be enough to sway them in this direction.

Yet if a centralised cap simply allows customers to disengage themselves from considering their banking arrangements, then it could possibly end up being the wrong one.