The Financial Conduct Authority today brought in measures to help people struggling with their finances as a result of coronavirus.
Fee-free overdrafts of up to £500 will be available to everyone, customers will be able to borrow more than this if needed, and those with outstanding loans and credit card debts will be offered three-month payment holidays.
Borrowers taking the payment holiday will still be charged interest, which must be repaid at a later date.
The FCA has confirmed measures to give all consumers in debt the same treatment
Most banks have already brought in some or all of these options for customers, but the announcement today means all banks and building societies will have to offer these options to customers.
Customers who bank with Barclays, HSBC, Lloyds Banking Group, including Halifax, Nationwide Building Society, Santander and Royal Bank of Scotland and NatWest will be eligible to access payment holidays and overdraft facilities from today, while customers with other banks and building societies will benefit by next Tuesday at the latest.
This is Money takes a look at what the new rules mean for you.
Overdraft lifeline for bank customers
The UK’s six biggest high street banking names have already announced individual measures to support overdraft customers.
Lloyds, HSBC and Santander opted for increased fee-free overdraft buffers, while Barclays and Nationwide offered to write-off customers’ overdraft fees.
But from today, FCA has said all banks and building societies must offer customers a £500 interest-free overdraft buffer for the next three months if a customer in financial difficulty requests it.
However, you can only apply for this on your main current account – the one into which you receive your salary or income.
Under the new measures, those who already have an overdraft will not be charged on the first £500 they borrow, while those who do not already have an agreed overdraft facility are able to request one up to £500.
The regulator said: ‘Where an impacted customer holds an arranged overdraft facility that presently exceeds £500 the interest-free amount may be restricted to £500. Firms may offer interest-free overdrafts of more than £500.’
John Crossley, head of money at comparison site Compare the Market, said: ‘The FCA is right that problems in the overdraft market need to be addressed at this challenging time.
‘It is encouraging that the regulator has now ordered banks to cut interest rates on arranged overdrafts of up to £500 to zero, for up to three months for those people struggling financially as a result of coronavirus.’
Higher overdraft charges suspended temporarily
Meanwhile, the regulator has also required banks to ensure overdraft customers who are charged interest are not paying more for the next three months than they would have done before.
All big banks except for NatWest and Royal Bank of Scotland were planning to bring in changes to their overdraft rates, setting them at 35 per cent APR or higher.
|Bank account||Old overdraft rate||New rate for majority||Fee-free buffer?|
|HSBC Advance||17.9%||39.9%||Yes – £25|
|First Direct First||15.9%||39.9%||Yes – £250|
|M&S Bank||15.9%||39.9%||Yes – £250|
|RBS/NatWest Select||19.89% (plus £6 monthly fee)||39.49%||No|
|Monzo||50p per day above £20||19%/29%/39%||No|
|Barclays Bank Account||Tiered rate||35%||Yes – £15|
|TSB||19.84% (plus £6 monthly fee)||39.9%||No|
|Lloyds/Halifax/Bank of Scotland||Tiered rate||39.9%
(27.5% for Club Lloyds customers)
|Yes – £50|
Andrew Hagger, founder of personal finance site Moneycomms, said: ‘In some cases the old tariffs were more expensive so perhaps the FCA should have insisted that the bank charges the lower of the two tariffs.’
For example, a Santander 123 customer with an overdraft of less than £1,065 would pay less under its change from a daily fee to a rate of 39.9 per cent APR, but someone deeper in the red than that would pay more. As a result, the bank has temporarily set its overdraft at a lower 19.9 per cent.
The FCA’s proposals on overdrafts, which could come into force next Thursday for three months
Hagger added: ‘I think it’s a temporary suggestion from the FCA, but it is seemingly frustrated that its course of action saw most lenders adopt a near 40 per cent overdraft rate for authorised borrowing, otherwise it wouldn’t have made mention of it.’
Should you extend your overdraft?
Claudia Nicholls, from comparison site Money Supermarket, said: ‘Regular overdraft users that borrow in excess of £500 should be mindful that these new proposals would be time-limited and would come to an end after three months. After that, the FCA’s new rules would apply.
‘With many banks expected to charge interest rates of nearly 40 per cent, if you regularly borrow more than £500 from your overdraft you could pay significantly more in fees.’
Accessing help from your bank
Banking trade body UK Finance has warned customers to ‘think carefully’ before making use of these measures.
‘Only do so if you need immediate help,’ says Eric Leenders, personal finance boss at the organisation.
‘Where customers can still afford to make payments, they should continue to do so.’
He is advising all customers who need and want to apply for any of today’s emergency measures to go online to their bank’s website first.
‘Lenders are constantly keeping their websites updated with the latest information, including FAQs, which can answer many queries,’ he adds.
Credit cards and personal loan freeze
The other big measure concerns credit card and personal loan borrowers.
Mortgage borrowers are already allowed to ask for a payment holiday of three months and the FCA has asked banks offer the same thing for credit card borrowers and those with personal loans.
They will be able to freeze their payments for three months or pay a ‘nominal’ sum which may be lower than the required minimum payment or how much they usually pay.
Alastair Douglas, chief executive of credit comparison site Totally Money, said: ‘If you’re approved to take the payment break, you won’t need to make a minimum payment for three months, and you won’t be charged a late payment fee.
‘But, you need to contact your lender and arrange the payment break with them. Otherwise, you will be charged a fee for missing a payment and it could affect your credit score.’
If you’re approved to take the payment break, you won’t need to make a minimum payment for three months, and you won’t be charged a late payment fee. But, you need to contact your lender and arrange the payment break with them.
Alastair Douglas, Totally Money
The FCA also said it didn’t expect customers to lose out on their 0 per cent balance transfer offers even if they didn’t make any payments for three months, as they would not be treated as being in arrears.
Douglas said: ‘Contact your lender as soon as possible, either online or by phone. Let them know your situation and ask for the payment break.’
Customers with personal loans who face difficulties with their finances can also ask for repayments to be put on hold for three months.
The regulator confirmed this morning that this includes guarantor loans, logbook loans, home collected credit, a loan issued by Community Development Finance Institution and some loans issued by regulated credit unions, but not payday loans.
The FCA has confirmed that customers in ‘persistent debt’, those who have paid more in interest, fees and charges than have paid off their balance, should not have their credit cards cancelled for at least three months.
Debt rules introduced in 2018 could have seen this happen, but these regulations have been temporarily shelved due to coronavirus.
Will I still be charged interest?
It is important to note that you will still incur interest on an outstanding credit card balance, this is not written off, you are simply delaying your repayments.
This could mean you end up owing more interest over the life of your borrowing as you’ll owe interest on your existing balance, plus the accrued interest charged during the payment holiday.
The FCA said: ‘With the exception of the £500 overdraft proposal, firms would be entitled to charge a reasonable rate of interest where a customer requests a temporary payment freeze.
‘Firms must review their prices to consider whether they are consistent with the obligation to treat customers fairly in the light of the exceptional circumstances arising out of the coronavirus in order to ensure that they do not pose unjustifiable burdens on these consumers who may be experiencing payment difficulties.’
James Jones, head of consumer affairs at credit reference agency Experian, said: ‘Lenders want to help support their customers, as well as meeting the regulatory requirement to “treat customers fairly” so it’s crucial that you speak to your lenders and other providers as soon as possible if you are struggling.
It’s crucial that you speak to your lenders and other providers as soon as possible if you are struggling
‘Many lenders are already being flexible and offering support – such as reduced payments, payment holidays and credit limit increases – to try help customers during these difficult and uncertain times.
‘It’s important that customers discuss their situations and options with lenders where support is needed because there is no one-size-fits-all solution.’
Nicholls added: ‘Consumers struggling with overdrafts and credit card debt do have options beyond the FCA’s measures such as shopping around for better deals and talking directly to providers – providers are obligated to take into consideration the individual situation of a borrower.’
Will it affect my credit score?
The FCA said anyone using any temporary measures to help their finances ‘should not have their credit rating affected because of this.’
The UK’s big three credit rating agencies Experian, Equifax and TransUnion have already said mortgage payment holidays would not affect customers credit scores – providing customers formally agree the payment holiday before cancelling payments.
Alastair Douglas said: ‘As long as you talk to your bank or lender and arrange the payment freeze with them, there will be no effect on your credit score. The important thing is not to just cancel the direct debit without speaking to them first, as this will have an impact.
‘Once a payment holiday is in place, it’s a good idea to check your credit report regularly to make sure it’s not affecting your score, and it’s been implemented correctly. Banks and lenders are very busy at the moment, and operating with fewer staff, so it’s sensible to make sure nothing slips through the net, so you can quickly put things right if they do.’
What about car finance?
Joanna Elson, chief executive of the Money Advice Trust, welcomed the FCA’s proposals but said: ‘We need to know more about what the regulator intends to do on other types of borrowing like car finance, guarantor loans and other high-cost short-term credit products.’
It is true that proposals to help those struggling with car finance payments were not included in this round of FCA proposals although the BBC reported this morning borrowers could be allowed to freeze their car finance payments for three months if they are struggling.
In the meantime, consumers should read This is Money’s guide to what drivers can do if they’re concerned about their ability to make payments.
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