The Financial Conduct Authority (FCA) has confirmed it will introduce new rules in April this year that it says will make the costs of overdrafts clearer and easier to compare.
The rules will mean banks can only charge for overdraft users a simple annual interest rate – without additional fees and charges.
According to the FCA, seven out of ten overdraft users will be better off or see no change in cost.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said:
'Our changes expose the true cost of an overdraft. We have eliminated high prices for unarranged overdrafts.
'This will result in a fairer distribution of charges, helping vulnerable consumers, who were disproportionately hit by high unarranged overdraft charges, and many people who use their overdraft from time-to-time.'
However, many banks have responded by hiking the interest rates they charge on overdrafts and several of the largest providers are set to introduce rates of up to 40%.
The FCA has sent a letter to the providers asking them to explain what influenced their decision and to ask how the banks will deal with any customers who could be worse off following the changes.
It said some firms could reduce or waive interest for customers who are in financial difficulty because of their overdraft.
Internet links: FCA press release FCA letter