Overdraft remedies evaluation: Positive results…subject to impact of cost of living crisis

The headline point from the FCA’s post-implementation evaluation paper (EP23/1) on its 2019 overdraft rule changes is that there has been £1 billion in savings for customers from the two separate measures it introduced. This includes: 

• More than £500 million in charges saved due to the pricing rules that came into force in April 2020.
• Up to £486 million saved due to measures to help customers manage repeated overdraft use, which came into force in December 2019.

However, the evaluation was carried out on pre-cost of living crisis data. The FCA admits that the crisis is likely to change patterns of overdraft use, and the impact of its pricing remedies.

Other points of interest from the paper (which was published with a technical annex) include:

Overall benefits of remedies package should be able to weather the cost of living crisis

The FCA notes that the new pricing structures adopted by lenders following its policies are centred around higher interest rates but no fixed fees. These structures may have led to higher borrowing costs for consumers who use their overdraft for large purchases or long-term borrowing. Its analysis suggests that these consumers represent no more than 1.4% of consumers in its sample (which ended in August 2021).

While the number of consumers using their overdraft in this way may have increased after the last date in the sample due to the cost of living crisis, the FCA appears confident that they are likely to fall under their PCA provider’s definition of a repeat user and will benefit from the FCA’s repeat use remedies. According to the FCA, the total package of remedies is therefore likely to be generating net benefits even if consumer behaviour temporarily changes due to the cost of living crisis.

Repeat use strategies using a range of customer communication methods are more likely to be effective

On the basis of the evidence from this evaluation, past FCA research and engagement with firms, the FCA concludes that strategies that use a range of methods to communicate with customers are more likely to be effective (see further on this below in relation to the findings from its review of firms’ repeat use strategies).

In addition, the FCA suggests that if firms are finding they are very successful at helping the customers in their strategy, marginally expanding the definition of repeat use may bring similar benefits to customers who would not have otherwise qualified. The FCA acknowledges that the optimal level of thresholds determining repeat use is difficult to pin down and firms may want to take the results of its evaluation in this area as a starting point in their own assessment of their strategies.

Success of repeat use remedy shows that outcomes-based regulatory approach works

Based on account-level data from a sample of six firms, the FCA found that average balances and charges tend to decrease over time for those who are within firms’ repeat use and financial difficulty strategies, in line with its expectations.

In its “lessons learned”, the FCA further concludes that outcomes for repeat users, in general, appear to be improving although the impact varies between firms . This is both when using the FCA’s definition of a repeat user (an individual that uses their overdraft in every one of the previous 12 months) and when using the firms’ own definitions. The FCA sees this as evidence that a non-prescriptive outcomes-based intervention like the repeat use remedy can be successful in delivering the outcomes it is seeking. It estimates that consumers will save between £88 million and £105 million in charges a year from now on due to its actions on repeat use.

Access to credit has not been significantly affected by pricing remedies

Another “lesson learned” is that regulatory action on pricing practices can result in significant savings for consumers without strong evidence of negative consequences in terms of access to credit. However, while finding a lack of evidence of loss of access to overdrafts following introduction of the remedies, the main paper does concede that these results do not account for the cost of living crisis, which may have increased moves by customers to other forms of credit.

PCA overdraft repeat use strategies: Don’t forget the Consumer Duty

The FCA has also published the findings from a request to firms that provide overdrafts to PCA customers to share their overdraft repeat use strategies. This was done in the context of wider work to understand how firms are supporting customers facing cost of living issues.

The FCA refers to its September 2020 finalised guidance ‘Overdrafts and coronavirus: additional guidance for firms’, which is relevant to the examples that it cites in its findings. It points out that the guidance builds on its rules in CONC 5C and 5D as well as Principles 6 and 7, and emphasises that it is also relevant for borrowers in financial difficulties due to circumstances other than the pandemic such as the rising cost of living as well as meeting the requirements of the forthcoming Consumer Duty. The latter is given a special mention by the FCA, which states that firms should consider the Duty’s requirements when reviewing and developing their overdraft repeat use strategies.

The consumer understanding outcome is a particular focus, with firms expected to pre-test their repeat use strategies/interventions and communications where appropriate (including through behavioural testing) and refine them (in light of experience) to ensure the target customers are likely to respond appropriately to the messaging they receive about the need to change their behaviour. The FCA refers firms to its finalised guidance on the Consumer Duty for examples of the types of testing approaches and different data sources they could use to monitor customers’ behaviour to ensure their approach delivers good outcomes.

There is also a reminder that under the Duty’s rules firms must equip retail customers to make decisions that are effective, timely, and properly informed, which may include developing nudge practices to help customers more generally to manage their finances better (eg in choosing between overdraft use, credit cards, or other forms of credit).

For our thoughts on issues to consider in meeting the requirements of the consumer understanding outcome, take a look at this Engage article: ‘Consumer Duty: navigating the Consumer Understanding Outcome’. The article can be found on our Consumer Duty hub, which also provides a number of other useful resources to help firms with their implementation of the Duty.

Based on the FCA’s findings of what it considers to be good practice, and its areas for concern, some other key points for firms to consider include:

• Identifying and monitoring of overdraft repeat use customers: A wide range of measures, such as missed payment data or use of other credit products, should be used to identify and monitor repeat use customers. Ideally policies and procedures need to be adapted through a process of regular review (a ‘test and learn approach’ to strategies).
• Communicating with customers and gathering information: A wide range of communication tools to engage with repeat use customers should be employed, eg letters, emails, and in-app messaging and push notifications. Communications with those customers showing signs of actual or potential financial difficulties should be proactive, rather than waiting for the customer to make contact after an initial firm communication. They should also be tailored to take account of the customer’s specific circumstances, instead of adopting a “one size fits all” approach. There is a certain sense of “déjà vu” here, given the similar findings in this area contained in the FCA’s November 2022 report on firms' treatment of borrowers in financial difficulty following the COVID-19 pandemic. For more on the November 2022 report, see our Engage article: ‘FCA Report on the review of borrowers in financial difficulty following COVID-19’.
• Interventions to support customers: A range of interventions to support customers in actual or potential financial difficulties to reduce their overdraft usage should be offered, eg reducing APRs, payments arrangements, forbearance, and write offs. There should be clear processes in place for such customers, directing them to specialist financial guidance teams to identify the appropriate intervention.
• Monitoring the effectiveness of repeat use policies and procedures: Processes for reviewing policies, procedures, and systems periodically should be in place, allowing firms to identify changes that need to be made and with clear lines of senior management accountability for each policy. Ideally leadership should be actively involved in reviewing the outcomes of monitoring and challenging the business to innovate and find ways to deliver even more effective customer outcomes.

Next steps

The FCA welcomes views on its evaluation paper. Comments can be sent via email at evaluationpapers@fca.org.uk or in writing to: Economics Department, Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN.

On repeat use strategies, while many of the firms were meeting the FCA’s expectations, some were not. It has written to all firms highlighting the findings of its review.