Bank overdraft fees are to undergo a major shake-up, which the UK financial regulator is calling the biggest overhaul for a generation.
Banks and building societies will no longer be allowed to charge fixed daily or monthly fees for overdrafts.
In addition, there will no longer be higher fees for unplanned overdrafts than for arranged ones.
The regulator said the changes would make overdrafts “simpler, fairer, and easier to manage”.
In 2017, banks made more than £2.4bn from overdrafts – with 30% alone coming from unarranged overdrafts.
The Financial Conduct Authority (FCA) said the new rules would start by April 2020.
When they come into force, the typical cost of borrowing £100 through an unarranged overdraft will drop from £5 a day, to less than 20p.
Banks and building societies will be required to charge a simple annual interest rate on all overdrafts, and overdraft advertisements will need to come with that rate clearly displayed, to help consumers to compare various products.
The FCA’s chief executive, Andrew Bailey, said the overdraft market was currently “dysfunctional” and “causing significant consumer harm” because vulnerable customers are often hit by excessive charges for unarranged overdrafts, which can be 10 times as high as fees for payday loans.
“Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges, that are both a result of and driver of poor competition,” said Mr Bailey.
“The decisive action we are taking today will give greater protections to millions of people who use an overdraft, particularly the most vulnerable.”