Fundamental changes in the way that unarranged overdrafts are provided may be necessary, according to the Financial Conduct Authority.
In a new review of high cost, short term credit, the FCA is turning its attention to the charges imposed by banks for such unauthorised borrowing, which can be "high and complex", with some banks charging about £6 a day, or up to £90 a month.
Lloyds announced last month that it is ending unarranged overdraft fees from November, and Barclays has already stopped all unauthorised lending.
"We believe there is a case to consider fundamental reform of unarranged overdrafts, and whether they should have a place in any modern banking market," the FCA said.
Chief executive Andrew Bailey commented: "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.”
He pointed out that unarranged overdraft fees were often "significantly higher" than payday loans. If not banned, another option would be to impose a cap on charges, or demand some affordability checks.
The review also finds that previous action by the FCA on payday lending "has delivered substantial benefits to consumers". It states that 760,000 borrowers in this market are saving a total of £150m per year, firms are much less likely to lend to customers who cannot afford to repay, and debt charities are seeing far fewer clients with debt problems linked to high-cost short-term credit.
The FCA has therefore decided to leave the existing payday loan price cap in place, and to review it again in 2020.
Consumer credit questions
However the FCA is also consulting on proposed changes to its rules and guidance on assessing creditworthiness in consumer credit, in light of concerns about the risk of potential harm to consumers from poor culture and practice by firms. It believes some consumers are being granted credit which they cannot afford to repay, causing financial distress. It could also lead firms to develop processes which are unduly costly or restrictive.
It also identified particular concerns in the rent-to-own, home-collected credit and catalogue credit sectors. While there are similarities between high-cost credit markets and products, there are also significant differences in how they work and how people use them. The FCA is developing tailored solutions to these issues, and will consult on action to address these concerns in spring 2018.
Mr Bailey added: “High-cost credit products remain a key focus for us because of the risks they pose to potentially vulnerable customers. 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.
“However, there is more that we can do, and this review is about identifying the areas where consumers may be suffering harm so that we can focus our efforts accordingly."
Click here to access the consultation on consumer credit. The deadline for responses is 31 October 2017.