The Financial Conduct Authority (FCA), which overseas the UK banking and financial markets, is proposing new rules to protect customers by stopping banks from charging high prices for unauthorised overdrafts.
It described the current system of managing and charging for overdrafts as 'harmful to consumers' and in need of 'fundamental reform'.
Overdrafts are an everyday part of life for many people with the banks raking in £2.4bn in fees on overdrafts last year.
People who are less well-off tend to be hit the hardest, with some banks charging fees that are more than ten times as high as payday loan fees.
The FCA wants banks to fix the price for overdrafts, authorised or not, at a single interest rate with no fees and with an easy to understand APR so that customers can compare the rate against other products.
It also wants the banks to do more to help customers who rely on their overdraft because they are in financial difficulty by managing their overdraft use to avoid high charges.
A GOOD FIRST STEP BUT MORE MAY BE NEEDED
The proposals don't include a price cap for now because the FCA doesn't think it would solve the problem, but as AJ Bell's personal finance analyst Laura Suter points out hinting at a cap should encourage the banks to play fair.
'The regulator’s threat of a future price cap if banks fail to reform is presumably intended to make them sit up and take action now rather than face tougher measures in the future.'
The FCA may have its work cut out as most of the banks who took part in the consultation process saw nothing wrong with their overdraft charges and were against the idea of publishing an APR so that customers could compare rates.
Debt charity StepChange said it was 'extremely pleased' with the FCA's proposals and that they 'should help to disrupt the toxic debt spiral effect that overdrafts can create, trapping people in a persistent cycle of overdraft debt.'
Bank stocks have brushed off the news for now with the FTSE 350 Banks index up 0.6% compared with a 0.8% loss for the FTSE 100.
The FCA has already launched a probe into over-charging in the insurance industry for car and home insurance renewals which it also says is 'causing harm to consumers.'