Overdraft customers are set to be able to ask for another three-month interest-free buffer of up to £500.

Outlining proposals to continue help for struggling borrowers, the Financial Conduct Authority (FCA) said that for customers yet to ask for an arranged interest-free overdraft of up to £500, the time to apply for one would be extended until 31 October.

Customers who are negatively impacted by coronavirus and who already have an arranged overdraft on their main personal current account would be able to request up to £500 interest-free for a further three months.

Before the coronavirus outbreak, the regulator put plans in place for a huge shake-up of the way firms can charge for overdrafts, coming into force earlier this year.

Several lenders pegged their new arranged overdraft rates at around 40 per cent as a result – around double the rate that many customers were used to.

But lenders’ planned rate hikes were put on pause – as in April the FCA set a temporary general expectation that firms should ensure all overdraft customers are no worse off on price when compared with the prices they were charged before the overdraft rule changes came into force.

On Friday, the FCA said it does not propose to extend this temporary measure across the whole market, but overdraft customers who are financially impacted by coronavirus will still be able to ask their lender for a reduced interest rate on any additional borrowing over their £500 interest-free buffer.

Firms would need to ensure that customers can, on request, access a preferential interest rate in respect of any borrowing that is not interest-free, it said.

The FCA will continue to monitor firms’ overdraft pricing.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Banks will be able to ramp up overdraft charges to the sky-high levels they were planning before this all kicked off – suddenly you could be left paying around 40% interest on your coronavirus debts. This feels like an awful time to be dropping this kind of burden on people.”

The FCA is also proposing further support for people with credit cards, store cards and catalogue credit and personal loan customers who are coming to an end of a payment freeze, as well as those who are yet to request one.

It said that at the end of a payment freeze, firms should contact their customers to find out if they can resume payments – and if so, agree a plan on how the missed payments could be repaid.

If customers can afford to return to regular repayment, it is in their best interest to do so.

Anyone who continues to need help should get help, it added.

For customers still facing temporary payment difficulties as a result of coronavirus, firms should provide them with support by reducing payments on their credit card and personal loans to a level they can afford for three months.

Where a customer needs further temporary support to bridge the crisis, any full or partial payment freezes offered under the guidance should not have a negative impact on credit files, the FCA said.

But borrowers should bear in mind that credit files are not the only source of information lenders may use to assess creditworthiness.

Lenders may, for example, refer to information they already have about a customer.

Christopher Woolard, interim chief executive at the FCA, said: “We have been working closely with other authorities, lenders and debt charities to support consumers in the current emergency.

“The proposals we’ve announced today would provide an expected minimum level of financial support for consumers who remain in, or enter, temporary financial difficulty due to coronavirus.

“Where consumers can afford to make payments, it is in their best long-term interest to do so, but for those who need help, it will be there.”

Comments on the proposals are being invited by 5pm on 22 June and the regulator expects to finalise the guidance shortly afterwards.

The plans do not apply to other consumer credit products, such as motor finance, high-cost, short-term credit, rent-to-own, pawnbroking and buy-now, pay-later products. These are covered by separate guidance which will be updated soon, the FCA said.

Richard Lane, director of policy and external affairs at StepChange Debt Charity, said: “The extension of payment holidays for credit cards, overdrafts and other forms of consumer credit will come as a huge relief for the many thousands of households struggling to keep up with credit repayments during this pandemic.

“But unless further long-term support measures are put in place, this relief will be short-lived.

“Our own research has found that 4.2 million people have borrowed to make ends meet since lockdown began, storing up a tsunami of £6 billion of debt that is set to worsen if left unchecked.”

PA news agency