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Abu Dhabi, UAEMonday 23 July 2018

What the new bank fee caps mean for UAE customers

We assess how the Central Bank of the UAE's new measures will affect your credit card, mortgage, debts and more

Illustration by Alvaro Sanmarti
Illustration by Alvaro Sanmarti

The decision by the Central Bank of the UAE to cap fees and commissions has been lauded by personal finance experts for bringing transparency to the banking industry and ensuring customers are better protected.

Under the new guidelines, fees on retail consumer related services such as home loans and late payment fees on credit cards have been capped.

“We commend Central bank leadership in protecting the interests of consumers which will ultimately enhance trust and credibility in the overall banking industry," says Philip King, global head of retail banking for Abu Dhabi Islamic Bank, adding that the financial institution has always strived to design products that are “simple and transparent with no hidden fees or charges attached”.

It is this transparency the Central Bank is looking to introduce to the sector through its amended fee cap levels, which it says will protect consumers “from anti-competitive and unfair practices”.

Ambareen Musa, chief executive of price comparison website Souqalmal.com, says the latest move will prevent banks “from charging unreasonably high fees or arbitrarily increasing these fees, thus reducing the burden on bank customers”.

“Bank fees are, unarguably, a major source of revenue for banks,” she says. “And regulatory oversight in this aspect would go a long way in safeguarding consumers’ interests.

“An average bank customer holds at least one bank account and a debit card, with many holding a credit card or loan as well. We’ve all at some point or another paid bank fees without questioning the rationale behind it.”

Here we outline what has changed and how this affects banking customers in the UAE:

What new measures has the Central Bank introduced?

The Central Bank’s fee caps apply to 43 types of charges – with 24 either in line or lower than the old fee caps previously in place and 19 new fee types relating to home loans and credit cards.

The Central Bank said it is now undertaking “more active supervision of the banking sector” and that banks and finance companies must “have the appropriate product approval processes in place for all products”.

This, it says, means banks must examine the “appropriateness of the fee calculation” applied to a product or service, and if applicable, “charge lower fees than those prescribed in the caps”.

The Amendment also states that banks must notify and seek approval from the Central Bank for any planned introduction of a new fee or change of fees larger than five per cent. All fees highlighted in the amendment are exclusive of five per cent VAT. The Central Bank also pledged to review banking fees annually. The central bank declined to release more information about the fees when contacted by The National.

Keren Bobker, an independent financial adviser with Holborn Assets said the new clarity “was fairer” for customers. “While there do not appear to be significant changes to the maximum fees that banks can charge, it has been made clear that banks should not automatically default to the maximum permissible and also that they must clearly display their fees and charges on their websites," she says.

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What regulations were in place before?

The new caps are an Amendment to Annexure 2 of the Regulations Regarding Bank Loans & Services Offered to Individual Customers (2011). This was issued in February 2011 to help curb the rampant lending by UAE Banks that had taken place in the run up to the global financial crisis. The measures introduced seven years ago limited loan amounts to 20 times a customer’s salary and repayment periods to 48 months.

When it came to credit cards, banks could only issue cards to those earning over Dh60,000 a year and they had to declare their interest rates on loans, overdraft balances and credit card balances.

This document also set out the debt burden ratio, which insisted that deductions for debt payments from a customer’s salary could not exceed 50 per cent of his gross salary.

The document also laid out a table of maximum limits for fees and commissions charged on services such as account opening and minimum account balances as well as any penalty fees. It is this table of fees that has now been updated.

How will consumers benefit?

The most important step is that the Central Bank demands all banks to publish the new fee caps on their websites. This instantly gives consumers more information on how much they are paying for any product or service.

“While some fees are par for the course when you apply for a banking product like loan processing fees and credit card annual fees, others like late payment fees are simply avoidable,” says Ms Musa. “Most customers would be aware of the former, but the latter are often hidden in the small print. As a result, unacquainted customers don’t end up paying too much attention to such fees or how they can impact them in the long run.”

Ms Musa uses the example of credit card late payment fee and over-limit fees, both of which currently range between Dh200 to Dh300 across most banks in the UAE.

“Considering how high interest rates on UAE credit cards already are, such fees only make repayment more difficult for struggling borrowers," she says.

Rasheda Khatun Khan, a wealth and wellness planner and a panellist on The National’s Debt Panel, says the new caps are a great prevention method for those seeking to take out new loans and lines of credit.

“This will really shape a new landscape for the way credit is sold here in the UAE. Perhaps it could also include the way the interest rate is sold as many consumers believe they are paying a much lower interest rate than they actually are.”

Jon Richards, chief executive of the UAE financial comparison site yallacompare, says the caps will provide a common framework for local banks to operate in, with regards to certain fees and commissions, and set limits for how much banks can charge their customers for them.

“Previously, while the majority of banks played fair with their fees and commissions, a few outliers would hide large fees in their services," he says. "Late payment fees, commissions on mortgages, or fees for going over your credit card limit were often the most common, and despite fee caps already being in place, our understanding is that some were relatively high.

“The new caps are designed to eradicate the practice of charging extortionate fees for certain services, so that consumers can be clear about what they’re likely to be charged for, and how much it’ll cost them."

How could the caps help those struggling with debt?

Mr Richards says debtors will experience some relief if late payment fees are included in the caps. “Late payment fees don’t exactly ease the burden when you’re trying to pay down what you owe, so any cap on them would be welcome.”

However, he stresses that the caps do not mean debtors will be let off any debt they owe. “You will still need to pay back what you’ve borrowed, under the interest rate terms that you’ve agreed. These new caps may just help you save a little bit when it comes to the service fees that you’re paying for."

Steve Cronin of DeadSimpleSaving.com says the new caps will protect vulnerable customers trapped by “eye-wateringly high rates of interest on personal loans, credit card balances and consolidation loans, as well as high penalties for missed payments”.

“Loans and cards are aggressively marketed, but few realise how much trouble they can get into if they don't manage their debt carefully," says Mr Cronin. "One unexpected problem, such as a sick relative, can lead to missed payments and spiralling debt."

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How will it help mortgage holders?

Brendan Kennelly, senior mortgage consultant at the UAE mortgage site Mortgagefinder says the new fee caps – which are yet to be determined – could help mortgage holders get better deals from their existing banks or new banks and reduce the likelihood of overcharging by banks.

“There are already fee caps for refinancing a mortgage, which is capped at Dh10,000 or 1 per cent (of the outstanding balance), whatever is lower. Some banks charge an additional 1 per cent ‘break fee’ if the mortgage is within a fixed rate term, this may be relevant to the new announcement," he says.

However, Mr Kennelly says reduced fees also mean "reduced income for banks".

"They may try and mitigate this by increasing margins but I think this is unlikely,” he says.

Mr Richards says any cap that helps drive down the cost of taking out a mortgage is welcome.

“Hopefully, it will make more people eligible for home finance, and allow more people to genuinely consider home ownership,” he says.

How will it help credit card holders?

Mr Richards says this depends on the type of credit card holder that you are. Those that diligently pay back everything they owe every month are unlikely to have incurred any nasty fees, he says, therefore will be unaffected.

“However, if you’re constantly hovering around the limit of your credit card, the caps should come in handy – we wouldn’t be surprised to see a cap on late payment fees and fees for going over the limit (though that is yet to be confirmed),” he says.

Mr Richards stresses that the savings customers will make from these caps will not be world-changing, however, every little helps when paying down debt.

“The hope is that the caps will allow some people to regain control of their finances.”