By Huw Jones
LONDON (Reuters) - Banks will be banned from charging higher fees for unarranged overdrafts, Britain's financial watchdog proposed on Tuesday, in what it called a radical move that could limit availability of free banking.
The Financial Conduct Authority (FCA) said that banks earned more than 2.4 billion pounds from overdraft charges in 2017, with around 30 percent of that from unarranged overdrafts - where customers become overdrawn without prior agreement or exceed any agreed overdraft limit.
"Today we are proposing to make the biggest intervention in the overdraft market for a generation," said FCA Chief Executive Andrew Bailey.
British lawmakers, consumer groups and the Church of England have all called for changes in the so-called high-cost credit sector to stop vulnerable people getting further into debt as high fees and interest charges add up.
More than half of banks' unarranged overdraft fees came from just 1.5 percent of customers in 2016, the FCA said.
Unarranged overdraft fees can, in some cases, be more than ten times as high as fees for payday loans, a sector whose interest rate charges the FCA has already capped.
The FCA is proposing that the price for each overdraft is a simple, single interest rate, with no fixed daily or monthly charges.
"Free-if-in-credit banking is unlikely to disappear quickly as a result of our overdraft proposals, but may become less widely available in future because of other factors," the FCA said.
There would also be a ban on fixed fees for using an overdraft facility.
The proposals on the changes are being put out to public consultation until March.
"Banks will no longer be able to charge rip-off unarranged overdraft charges, which have long penalised their customers, many of whom can afford it the least," said Jenni Allen, a managing director at consumer group Which?.
StepChange, a charity that gives advice to people in debt, called the proposals robust, overwhelmingly needed and very welcome.
FCA overdraft chart: https://tmsnrt.rs/2GrOKuO
Following proposals in May, the watchdog said it was also making new rules to strengthen protection for consumers using home-collected or "doorstep" lending, catalogue credit and store cards.
Additional proposals related to buy now pay later offers could save consumers 40 million to 60 million pounds.
The watchdog also published its final report from its retail banking review, saying it would initiate further work in three areas: payment services, banking for small businesses, and monitoring of retail banking business models.
(Reporting By Huw Jones, editing by Sinead Cruise and Kirsten Donovan)