Before 2020, an unarranged overdraft could be one of the most expensive ways to borrow in the United Kingdom, often more expensive than a payday loan, but priced in a way that made real comparison almost impossible. The Financial Conduct Authority rewrote the rules for how banks and building societies can charge for overdrafts, and the reforms are still the reason overdraft pricing looks the way it does today.
What the reforms actually banned
The FCA’s overdraft rules, confirmed in 2019 and mostly in force from 6 April 2020, banned fixed fees for using an overdraft, meaning firms can no longer charge a flat daily or monthly amount simply for having an overdraft facility or for dipping into it. Alongside that, the FCA banned charging a higher price for an unarranged overdraft, one used without the account holder’s prior agreement, than for an arranged overdraft on the same account. Before the reforms, unarranged borrowing was routinely priced far above arranged borrowing, which is part of why unarranged overdraft charges had become so concentrated: the FCA found that more than half of banks’ unarranged overdraft fee revenue came from just 1.5% of customers.
The single interest rate requirement
In place of the old mix of fees, firms are now required to price overdrafts using a simple annual interest rate, applied consistently whether the borrowing is arranged or unarranged. That single-rate structure is what makes today’s overdraft pricing look more like a standard loan rate than the layered daily-fee system it replaced, and it removes the incentive for a bank to profit specifically from unplanned, unarranged borrowing.
The advertising requirement
Firms must also advertise their arranged overdraft price using an APR, the same headline figure used to compare credit cards, personal loans and other forms of borrowing. Before this requirement, overdraft costs were disclosed in ways that made genuine like-for-like comparison difficult, since one bank’s daily fee structure could not easily be set against another’s. Requiring an APR figure puts an overdraft on the same footing, at least for comparison purposes, as other regulated credit products.
Repeat use and refused payments
Separately from the pricing rules, related measures targeting repeat use of overdrafts and the handling of refused payments took effect from 18 December 2019, ahead of the main pricing changes. These addressed the pattern of customers relying on an overdraft, particularly an unarranged one, on a recurring basis, which the FCA treated as a sign of potential financial difficulty that firms needed to identify and respond to.
The overall effect on cost
The practical effect the FCA reported was a sharp fall in the cost of unarranged borrowing: the typical cost of borrowing £100 through an unarranged overdraft fell from around £5 a day under the old fee structures to less than 20p a day under the new single-rate system. The FCA’s own analysis found that all users of unarranged overdrafts would be better off or see no change, while the effect on arranged overdraft users was more mixed, since some previously very cheap arranged overdrafts became relatively more expensive once cross-subsidy from unarranged fees disappeared; even so, the regulator expected around seven in ten overdraft users overall to be better off or see no change.
Why this matters when comparing borrowing options
An overdraft is not a cash advance product and is not regulated in exactly the same way as short-term credit, but the reforms are directly relevant to anyone weighing up an overdraft against a short-term loan, since the post-2020 single APR figure is now a genuinely comparable number. A cash advance’s total cost, including any fees, should be set against a bank’s advertised arranged overdraft APR before deciding which is cheaper for a particular amount and repayment period, rather than assuming an overdraft is automatically the cheaper option because it is attached to an existing current account.
FAQs
Can a bank still charge more for an unarranged overdraft than an arranged one?
No. The reforms specifically banned charging a higher price for unarranged borrowing than for arranged borrowing on the same account.
Are daily overdraft fees gone completely?
Fixed fees for having or using an overdraft were banned; pricing must now be a simple annual interest rate rather than a flat daily or monthly charge.
When did these changes take effect?
The core pricing reforms took effect on 6 April 2020, with related repeat-use and refused-payment measures starting earlier, on 18 December 2019.
Does the APR requirement make overdrafts directly comparable to loans?
It makes the headline rate comparable to other APR-quoted credit products, though an overdraft’s flexible, revolving structure is still different in practice from a fixed-term loan.
The bottom line
Since 6 April 2020, UK overdraft pricing has had to use a single advertised annual interest rate, with fixed daily and monthly fees banned and unarranged borrowing no longer allowed to cost more than arranged borrowing on the same account. The reforms cut the typical cost of unarranged borrowing sharply and gave borrowers a genuinely comparable APR figure to weigh against other forms of credit. This is general information, not financial advice on a specific overdraft or loan.