In some cases, banks were charging ten times more than payday loans for unarranged overdraft fees, with those in deprived areas hit hardest.

The findings are part of the UK regulator’s high-cost credit review and the impetus for fundamental new reforms on the way banks charge for overdrafts.

The new proposals aim to change how banks charge for overdrafts, which would bring to an end to banks charging higher prices for unarranged overdrafts.

The FCA has also strengthened protections for consumers using home-collected credit (doorstep lending), catalogue credit and store cards and it is consulting on further measures on ‘buy now pay later’ offers.

The FCA says that each overdraft should have a simple, single interest rate – no fixed daily or monthly charges; it also plans to prevent firms charging higher prices when customers use an unarranged overdraft. The new measures will ban fixed fees for borrowing through an overdraft and said that overdraft prices must be advertised in a standard way, allowing easy comparison. The FCA also said banks should do more to identify ‘at risk’ customers showing signs of financial strain.

The moves are part of a wider investigation into the cost of borrowing. In May this year, the FCA introduced reforms requiring that banks and building societies provide digital eligibility tools that allow customers to check if they can get a cheaper overdraft with another provider, plus overdraft charge calculators that help customers translate interest rates into pounds and pence. It also introduced alerts and changes to show overdrawn balances are displayed at cash machines will address unexpected overdraft use.

Andrew Bailey, chief executive of the FCA called it 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.  It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform.  We are proposing a series of radical changes to simplify the way banks charge for overdrafts and tackle high charging for unarranged overdrafts.  These changes would make overdrafts simpler, fairer, and easier to manage.”

The end of rip-off charges

Consumer groups and debt charities welcomed the reforms.

Jenni Allen, managing director at Which? Money, said: “Finally, banks will no longer be able to charge rip-off unarranged overdraft charges, which have long penalised their customers, many of whom can afford it the least.

“The regulator must now ensure these important changes are swiftly introduced and enforced to finally stop this unfair practice and put an end to these excessive fees.”

Peter Tutton, head of policy at charity StepChange, said: “We are extremely pleased to see the FCA’s plans for robust new rules on unauthorised overdraft charges. These should help to disrupt the toxic “debt spiral” effect that overdrafts can create, trapping people in a persistent cycle of overdraft debt. Requiring firms to intervene earlier and more meaningfully when their customers show repeated use of overdrafts is hugely important, too.”