FCA raises fresh concerns about overdraft fees

The Financial Conduct Authority has raised fresh concerns about how overdraft fees pay for current accounts and suggested tougher action could be in store.

The regulator's review found that 10% of current account customers generate a third to half of the profit from those accounts, mainly by paying charges for unarranged overdrafts. The findings suggest those fees fund "free" current accounts, most of which have no upfront costs for the customer unlike in many other countries.

The FCA said it would consider the findings when deciding what measures to take on overdrafts. It has already said it is concerned that potentially vulnerable people are paying too much in fees to go overdrawn by small amounts.

In May the FCA proposed measures, including alerting customers when they are close to going overdrawn, to help consumers avoid charges. It stopped short of banning fixed fees for overdrafts but said it would consider such "radical" options.

Andrew Bailey, the FCA's chief executive, suggested the review's findings could prompt the FCA to toughen up its measures. :

“This is an important piece of work to help us understand the complexities of the retail banking market and how this may develop in the future. It provides more evidence that there is no such thing as free banking," Bailey said. "In particular, this evidence will inform the work we are doing on overdrafts, so we can fully understand the potential effects of the significant action we are considering taking in this market.”

Regulators have been trying for decades to increase competition in retail banking but the big high street lenders still have more than 80% of current accounts.

The FCA's review found major banks have a captive audience of customers who do not switch accounts and who go to their current account provider for other financial products without shopping around. More than half (52%) of current account customers with credit cards have one with current account provider. For personal loans the figure is 48% and for mortgages it is 32%.