This article is more than 1 year old

This article is more than 1 year old

The City regulator has accused UK banks of causing “significant harm” to their most vulnerable customers as it pushes ahead with a ban on excessive overdraft fees.

The Financial Conduct Authority (FCA) said it would stop the practice of high street banks imposing higher penalties for unarranged overdrafts than for agreed overdrafts, among a number of new rules announced on Friday.

Fees for unarranged overdrafts are more than 10 times higher in some cases than those charged by payday lenders, the FCA said.

Bank overdraft fees: all you need to know about the changes Read more

It expects the changes, first proposed in December, to make daily charges for borrowing through an unarranged overdraft more than 25 times cheaper. The typical cost of borrowing £100 through an unarranged overdraft is expected to plunge from £5 a day to less than 20p a day.

Andrew Bailey, the FCA’s chief executive, said: “The overdraft market is dysfunctional, causing significant consumer harm. Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, which are often 10 times as high as fees for payday loans.”

Overdrafts, the money lent to customers when current account balances fall below zero, have long been a major driver of profits for banks, who use the fees in part to cover the costs of free-to-open current accounts.

FCA figures show British banks made £2.4bn from overdrafts in 2017, of which about 30% came from unarranged overdrafts.

People in deprived areas were more likely to be caught by the fees, while more than half of banks’ unarranged overdraft fees came from only 1.5% of customers in 2016, the FCA’s research found.

Gillian Guy, the chief executive of Citizens Advice, said the rules should help prevent thousands of people becoming trapped in a “debt spiral”.

She said: “Overdraft charges can have serious knock-on effects for people’s debt and mental health. If, after these measures are introduced, people still pay over the odds, the FCA should review the need for an interest rate cap to ensure no one is paying back more than twice what they borrowed.”

Other changes being brought in include forcing banks to make the interest rates charged clearer and ending fixed fees, while the banks have also agreed to show the price of borrowing in pounds and pence to make pricing easier to understand.

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The new rules – the bulk of which will come into force by 6 April 2020 – will also aim to force banks to do more to identify and help customers stuck in their overdrafts for long periods of time. About 2.1 million people were overdrawn in every month of 2016, according to a report by the debt charity StepChange.

UK Finance, the banking lobby group, said the industry was working closely with the FCA to implement the rules, as well as looking at voluntary measures to make pricing easier to understand.

Eric Leenders, a managing director at UK Finance, said: “Overdrafts can provide a convenient way for customers to smooth their short-term cashflow and there is a highly competitive market in the UK, with over 96 products on offer.

“We would always urge customers to speak to their bank and arrange an overdraft in advance to ensure payments are honoured.”