The high charges banks apply to overdrawn customers will be examined by the Financial Conduct Authority (FCA) to ensure they are fair.
The financial regulator says that overdraft charges are often excessively high given overdrafts involve little risk for banks. It also believes that charging structures are too complex, making it difficult for consumers to compare accounts.
The FCA believes that “fundamental changes” to the way overdrafts are calculated and charged may be needed across the industry.
The announcement follows a Competition and Markets Authority investigation last year, which found consumers are being hit with unauthorised overdraft charges of around £1.2 billion each year.
As well as high overdraft fees, the FCA has also voiced concerns about catalogue credit, door-to-door lending, and motor finance. It will announce further updates on all of these sectors at the start of 2018.
‘Maintaining the status quo is not an option’
However, the regulator reports positive results from its intervention into the payday loans market. Rules introduced in January 2015 – which included capping interest charges – will now be extended until at least 2020.
It estimates that this cap has saved 760,000 customers around £150 million and that payday lenders are now less likely to take on financially vulnerable clients.
Andrew Bailey, chief executive of the FCA, says: “High-cost credit products remain a key focus for us because of the risks they pose to potentially vulnerable customers. We are pleased to see clear evidence of improvement in the payday lending market after a period when firms’ treatment of customers and their business models were often unacceptable.
“However, there is more that we can do, and this review is about identifying the areas where consumers may be suffering harm so that we can focus our efforts accordingly.
“In particular, the nature and extent of the problems that we have found with unarranged overdrafts mean that maintaining the status quo is not an option. We are now working to resolve these issues while preserving the parts of the market that consumers find useful.”