Banks could be banned from charging higher fees for unarranged overdrafts as part of crackdown on high cost credit sector

The City watchdog has proposed radical changes to overdraft fees charged by banks as part of a crackdown on the high-cost credit sector.

The Financial Conduct Authority wants to scrap fixed daily or monthly charges on overdrafts in favour of a single interest rate, it said today.

Banks could also be banned from charging higher fees for unarranged overdrafts.

The FCA said that banks and building societies made more than £2.4bn from overdrafts in 2017, with around 30 per cent coming from unarranged overdrafts.

The watchdog stopped short of setting a monthly price cap, which charities and MPs had called for.

Chief executive Andrew Bailey said it was the biggest intervention in the overdraft market for a generation.

He said: “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.”

The proposed reforms, which also includes urging banks to identify and help customers constantly in their overdraft, follow a consultation in May and have been backed by analysts.

“Some unarranged overdraft fees are scandalous rip offs: if you slip into an overdraft by accident, you can pay up to ten times more than the fees on payday loans,” Sarah Coles personal finance analyst at Hargreaves Lansdown said.

AJ Bell personal finance analyst Laura Suter said: “Brits have around £6.5bn outstanding in overdraft borrowing but this has fallen dramatically over the past decade, as people increasingly shift their debt to credit cards.

“So while these proposals will help those in persistent overdraft debt, it is by no means a silver bullet to stop the UK’s costly debt problems.”

Final reforms will be published in June next years once the FCA has received feedback on the proposals.