The FCA is banning fixed fees for borrowing through an overdraft as part of a major shakeup to the market.
The regulator is calling an end to fixed daily or monthly charges, as well as fees for having an overdraft facility.
Instead, the regulator will require banks and building societies to price overdrafts by a simple annual interest rate.
The moves come on the back of a research project from the FCA which has revealed that in 2017, firms made over £2.4bn from overdrafts alone, with around 30 per cent of this coming from unarranged overdrafts.
The regulator is also requiring banks and building societies to do more to identify vulnerable customers who may be using overdrafts.
The research showed that more than 50 per cent of banks’ unarranged overdraft fees came from just 1.5 per cent of customers in 2016, and deprived areas are most likely to be hit by fees.
FCA chief executive Andrew Bailey says: “The overdraft market is dysfunctional, causing significant consumer harm. Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, which are often ten times as high as fees for payday loans. Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges, that are both a result of and driver of poor competition.
“Our radical package of remedies will make overdrafts fairer, simpler and easier to manage. We are simplifying and standardising the way banks charge for overdrafts. Following our changes we expect the typical cost of borrowing £100 through an unarranged overdraft to drop from £5 a day to less than 20 pence a day.”