Plans to force banks to cut £2.4bn overdraft costs

The Financial Conduct Authority (FCA) is planning new rules to bring down the cost of many overdraft fees, which raked in over £2.4bn for banks last year alone.

The City regulator said its "radical" changes included a ban on lenders charging higher prices for unarranged overdrafts though campaigners said they did not go far enough to protect "overdraft prisioners".

Also among the FCA's proposals:

:: Ensuring the price for each overdraft will be a simple, single interest rate - with no fixed daily or monthly charges.

:: Banning fixed fees for borrowing through an overdraft.

:: A requirement that arranged overdraft prices be advertised in a standard way, including an APR (annual percentage rate) to help customers compare them against other products.

:: Telling banks to do more to identify overdraft customers who are showing signs of financial strain or are in financial difficulty, and to help them to reduce their overdraft use.

The FCA said that 30% of the £2.4bn made by banks through overdrafts in 2017 came from unarranged borrowing costs which, in some cases, could be 10 times as high as payday lender's fees.

It identified that people living in deprived areas were more likely to be hit by the charges.

The proposals form part of the watchdog's high cost credit review, which has already put forward plans for a price cap on the rent-to-own sector .

The FCA said its proposed protections in the home-collected credit, catalogue credit and store card sectors would also be bolstered.

The regulator said additional protections on "buy now, pay later" offers would include stopping backdated interest for repayments made during the offer period.

The FCA's chief executive, Andrew Bailey, said its measures the biggest intervention in the overdraft market for a generation.

"These changes would provide greater protection for the millions of people who use an overdraft, particularly the most vulnerable."

Martin Lewis, the founder of moneysavingexpert.com, responded: "Many demonise credit cards, but debit cards are debt cards too when someone is overdrawn, and often they're far costlier.

"Now (Frankfurt: 11N.F - news) even the regulator, thankfully, is starting to feel that it's unfair to make society's poorest pay for others' banking - via hideous charges designed to entrap people in debt.

"Banks have reduced charges over the years, but not enough.

"Trying to calculate and compare overdrafts alone is flummoxing due to a multiplicity of charging structures - such as 20% APR, 50p a day, or 1p per day per £7 overdrawn - never mind seeing if other borrowing would be cheaper.

"This and the lack of competition for those in bank account debt, has led to millions of overdraft prisoners, permanently entrapped because their borrowing costs eat up their repayments.

"The FCA's consultation is on the right track - though our main disappointment is it fails to impose the total cost cap, which it's applying to other high-cost credit sectors like payday loans and rent-to-own."