Watchdog warns banks over high cost of unarranged overdrafts

The financial watchdog has taken aim at banks that charge high overdraft fees, warning the "status quo is not an option".

As part of a review into high-cost credit, the Financial Conduct Authority (FCA) said "fundamental changes" to the way unarranged overdrafts are provided may be necessary.

Charges for unarranged overdrafts are "often high" relative to the risks to lenders, and can be complex and hard for consumers to understand, the FCA found.

FCA boss Andrew Bailey said: "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."

The rent-to-own, home-collected credit and catalogue credit sectors could also face a crackdown after the body "identified particular concerns".

However, the payday loans market, much criticised for leaving vulnerable borrowers with excessive debts, is to escape further action.

The FCA's review said the sector has delivered "substantial benefits" to consumers, adding that 760,000 borrowers are saving a total of £150 million per year.

Following the introduction of a price cap, firms are "much less likely to lend to customers who cannot afford to repay" and debt charities are seeing fewer clients with debt problems linked to payday loans.

Mr Bailey said: "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."