CONC 5C.2 Charges for overdrafts to be interest rates

1The purpose of CONC 5C.2.1R is to permit a firm to impose an arranged overdraft charge or an unarranged overdraft charge on a customer only if the charge takes the form of an annual rate of interest. Consistent with this, a firm is forbidden from imposing on a customer a fee for making available an arranged overdraft facility (unless the amount of credit made available under the facility exceeds £10,000).

CONC 5C.2.1R does not affect an arranged overdraft charge or an unarranged overdraft charge, liability for which accrued before the date on which CONC 5C.2.1R came into force. CONC 5C.2.1R does affect, however, an arranged overdraft charge or an unarranged overdraft charge liability for which accrued on or after the date on which CONC 5C.2.1R came into force, irrespective of whether the arranged overdraft facility was granted or the agreement for the personal current account was made before or after the date on which CONC 5C.2.1R came into force.

There has to be a single, uniform contractual rate of interest in respect of an individual customer that applies to any amount of arranged overdraft balance (other than any part of the balance that is free). This means that a firm may not have a graduated overdraft charging structure, where different rates of interest apply to specified tiers or bands of arranged overdraft balance, even if a higher band or tier is described as being intended for occasional emergency borrowing, or where lower or higher rates are contingent on certain behaviour, such as making or maintaining certain amounts or frequencies of deposits. A firm should not, for instance, calculate an arranged overdraft charge using a rate of interest of 3 per cent per annum if the customer borrows £100 by way of arranged overdraft, but use a rate of interest of 5 per cent per annum if the customer borrows £300. A firm may, however, vary a rate of interest using a contractual power of variation if it is fair, valid and enforceable.

Similarly, there has to be a single, uniform contractual rate of interest in respect of an individual customer that applies to any amount of unarranged overdraft balance (other than any part of the balance that is free), although this rate of interest may be lower than that which applies to an arranged overdraft balance.

A firm is not prevented from providing in the terms and conditions of the overdraft that no interest is payable in respect of arranged overdraft balances or unarranged overdraft balances of up to specified amounts (sometimes described as “fee-free amounts” or “buffer zones”) where permitted by CONC 5C.2.1R. The purpose of CONC 5C.2.1R(7) is to prevent firms from offering fee-free amounts or buffer zones that are free only in certain circumstances. An example of a buffer zone that is not permitted is where no interest is payable if an unarranged overdraft balance does not exceed the upper threshold of the buffer zone, but where interest becomes payable in respect of the entire balance (including the part of the balance in the buffer zone) if the customer exceeds the threshold.

A firm is not prevented from waiving or reducing overdraft charges (in whole or in part) in appropriate circumstances (for example, where the firm is treating a customer with forbearance in line with other rules in this sourcebook).

CONC 5C.2.1R does not prohibit the level of the single, uniform contractual rate of interest from differing from customer to customer, or between personal current accounts for the same customer.

1. (a)

   The definitions of an arranged overdraft charge and an unarranged overdraft charge are broad.

2. (b)

   These definitions capture any charges that arise because a customer has used an overdraft, or that are triggered by - or the size of which are affected by - the fact that the personal current account has entered, remains in, or extended, a debit position.

3. (c)

   If the agreement provides that a charge is payable by a customer in exchange for the creation or continuation of an arranged overdraft facility, whether or not the customer in fact uses the facility, this charge is also caught by the definition of an arranged overdraft charge unless the facility has a pre-agreed limit in excess of £10,000. A charge of this sort is often referred to as a “facility fee” and payable periodically, for example annually.

4. (d)

   The definitions of an arranged overdraft charge and an unarranged overdraft charge are not limited to charges that are described as financial consideration for the provision of credit. They could include, for example, a charge that is expressed as being referable to the execution of the payment transaction, if the charge is payable only where the transaction results in the account being in an overdrawn position or remaining in such a position. A charge for a payment transaction that is payable irrespective of whether or not the current account has a credit balance or a debit balance is not, however, caught by these definitions.

5. (e)

   The definitions also do not include charges for operating or maintaining a personal current account (as distinct from charges for granting or continuing to make available an arranged overdraft facility in connection with the account), provided that the incidence and amount of the charges are not affected by whether or how much the customer uses an overdraft. A monthly account charge could be an example of such a charge.

CONC 5C.2 requires firms to use only a rate of interest expressed as a percentage applied on an annual basis to the relevant balance of arranged overdraft or unarranged overdraft. If interest is compounded, firms are free to choose the intervals at which they add arranged overdraft charges and unarranged overdraft charges to the principal balance, provided that the same compounding frequency is used in relation to the customer’s arranged overdraft and unarranged overdraft in respect of the same personal current account.

Firms are reminded of the obligation in CONC 3.5.3R(1) to include a representative example (including the representative APR) in a financial promotion that indicates a rate of interest or an amount relating to the cost of credit. Firms are also reminded of the obligation in CONC 3.5.7R(1) to include in a financial promotion a representative APR if the financial promotion states or includes certain matters. Firms are referred to the guidance in CONC 3.5.6G(2) in relation to how the rate of interest in CONC 3.5.5R(1) should be calculated for the purposes of the representative example in CONC 3.5.3R(1).

In CONC 5C.2.1R(1)(b), “impose” an arranged overdraft charge or an unarranged overdraft charge includes creating the contractual right to receive it, and relying on, or enforcing, the contractual right or purporting to do so.