The UK regulator is acting to stop how often vulnerable people are hit with charges for unauthorised use of overdrafts.

The UK financial regulator is proposing to stop how people on low incomes are hit by banks for unauthorised overdrafts, saying that lenders made £2.4 billion in overdrafts last year.

The Financial Conduct Authority said more than 50 per cent of banks’ unarranged overdraft fees were paid by only 1.5 per cent of customers in 2016, and that people living in deprived areas were most likely to pay such fees.

The practice should be stopped, the watchdog said. 

The FCA proposed that the price for each overdraft will be a simple, single interest rate - no fixed daily or monthly charges. Fixed fees for borrowing through an overdraft will be banned. 

Arranged overdraft prices must be advertised in a standard way, including an APR to help customers compare them with other products, the FCA said.

“It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform.  We are proposing a series of radical changes to simplify the way banks charge for overdrafts and tackle high charging for unarranged overdrafts,” Andrew Bailey, chief executive of the FCA, said.

Laura Suter, personal finance analyst at investment platform AJ Bell, applauded the change.

“Rather than having an array of charges, which can be per transaction, week or month of being overdrawn and a percentage of the amount borrowed, borrowers will have an easier-to-understand interest rate to help them know how much borrowing will actually cost,” she said. “Unarranged overdrafts are often too easy for people to fall into, with around 19 million people using them each year, and they can then face charges more than 10 times higher than payday loans.”

“Brits have around £6.5 billion ($8.22 billion) outstanding in overdraft borrowing but this has fallen dramatically over the past decade, as people increasingly shift their debt to credit cards. So while these proposals will help those in persistent overdraft debt, it is by no means a silver bullet to stop the UK’s costly debt problems,” Suter added.

(Editor's note: It is good that the regulator is taking action to protect vulnerable borrowers. Why should wealth managers be interested in this? Because such practices reflect poorly on the banking sector as a whole, and even the wealthiest client can fall prey to sharp practice if terms and conditions for credit products and services are not spelled out. In general, the best guard against this sort of activity is vigorous competition and the old warning of "let the buyer beware". However, with high street banking still dominated by a handful of banks, it is clear that the FCA and other regulators must keep a close watch on these practices in future.)