The Financial Conduct Authority (FCA) has unveiled plans for a crackdown on high-cost credit and overdraft charges following an in-depth review.
The measures include a cap on the cost of rent-to-own lending, making overdraft charges more transparent, and forcing catalogue credit and store card firms to do more to stop people getting into debt.
The FCA called for "fundamental reform" in the way banks charge for overdrafts, highlighting that in 2016 firms made an estimated £2.3bn in revenue from overdrafts, 30 per cent of which was from unarranged overdrafts.
The majority of unarranged overdraft charges are paid by just 1.5 per cent of customers, who pay around £450 per year in fees and charges.
Meanwhile on rent-to-own the FCA said the harm identified in this market was "sufficient in principle to consider a cap on rent-to-own prices" and it will now look at the impact this could have on the sector and how it might be structured, with a view to implementing one by April 2019.
The rent-to-own sector includes companies such as BrightHouse and PerfectHome which charge their 400,000 customers rates for household items paid for in instalments which the FCA said can be "exceptionally" high.
The FCA said it has seen examples where people have paid more than £1,500 for essentials like an electric cooker which could be bought on the high street for less than £300.
Andrew Bailey, chief executive of the FCA, said: "High-cost credit is used by over three million consumers in the UK, some of who are the most vulnerable in society.
"Today we have proposed a significant package of reforms to ensure they are better protected including the possibility of a cap on rent-to-own lending. The proposals will benefit overdraft and high-cost credit users, rebalancing in the favour of the customer.
"Our immediate proposed changes will make overdraft costs more transparent and prevent people unintentionally dipping in to an overdraft in the first place. However, we believe more fundamental change is needed in the way banks charge customers for overdrafts.
"Given the size of the market, our work here will be completed as part of our wider review into retail banking."
The FCA put forward proposals today for overdrafts that it believes will save customers up to £140m a year. Beyond that, it will consider more radical options to ban fixed fees and end the distinctions around unarranged overdraft prices.
The FCA is also consulting on mandatory rules to make it easier for customers to manage their accounts which include mobile alerts warning of potential overdraft charges, stopping the inclusion of overdrafts in the term "available funds" and requiring online tools to make the cost of overdrafts clearer;
Home collected credit was also in the FCA’s sights, as it sought to protect users of high-cost credit in stores and at the door by introducing new requirements to raise standards in disclosure and sales practices.
A package of reforms will prevent home-collected credit firms from offering new loans or refinancing during home visits without the customer specifically requesting this.
The changes will also bring in greater controls over the refinancing process, which may not work well for consumers. Changes in this area are estimated to save consumers up to over £34m a year.
The proposals will also see catalogue credit and store card firms forced to do more to help customers avoid persistent debt, following on from consumer protection rules the FCA brought in for credit card providers. These changes are estimated to save consumers up to £27.5m a year.
The FCA is consulting on the proposals from today and calling for feedback.
