James Daley

By James Daley

Another day, another FCA review. That's how I opened a blog last week, and it really does feel that way right now.

Today it's the turn of bank account overdrafts to to be thrown into the spotlight - an area where consumer groups have been shouting about the lack of transparency and comparability of accounts for years.

While overdrafts were regulated by the Office of Fair Trading, they repeatedly showed that they didn't have the stamina to solve the issues in this market. After losing a high profile court case against the banks a few years ago - which ruled that the OFT didn't have the right to apply its unfair contract terms regulations to overdrafts - it backed away from its mission to clean up banking. And though it produced a number of further reports acknowledging there were problems with bank accounts, it never followed through.

Transparency, transparency, transparency

The FCA has shown that it's made of tougher stuff. As it rightly says in its press release today, millions of people in the UK have overdrafts, and the increasing complexity of these products have meant that it's got harder not easier to compare accounts over the past few years.

Some banks charge fees by the day for using an overdraft, while some charge fees by the month. Others charge annualised interest rates. Some have buffers, so that you can bust your overdraft limit without getting hit with hefty fees. Some don't.

This has created a market where it's increasingly difficult for customers to compare one account with another. Furthermore, the lack of consistency in the way banks charge means that it's not difficult to draw the wrong conclusions if you're trying to shop around for an account.

An overdraft charge of £1 a day might sound attractive. But on a small overdraft, it could equate to an annual percentage interest rate of hundreds of percent.

End of free banking?

No doubt this investigation will reignite the debate around whether or not banks will have to start charging monthly fees for their current accounts. If the FCA clamps down too hard on overdraft fees - which subsidise those customers who stay in credit - then it may be that fee paying accounts start to become the norm.

Fee-paying accounts have the potential to be more transparent, and much fairer to customers as a whole, but most people hate the idea of them. It would be a brave regulator to push banks towards a model where they were forced to charge.

A good outcome from this review would be a move to force banks to standardise overdraft charges, so that customers can make meaningful comparisons. If this means that charges also come down, it will be a good thing for consumers. But the regulator needs to watch out for the unintended consequences. As I said in my blog about the credit card market last week, the crackdown on late payment fees in that sector ended up creating an unhealthy level of competition in other areas.

This review is great news, but there are no easy answers.