LONDON (Reuters) - Britain's financial regulator said fundamental reform of unarranged overdrafts was needed as it had significant doubts about whether they could continue in their current form and a cap on fees may not be the answer.
Members of parliament have questioned whether British banks charge high fees for customers who go overdrawn without permission to maintain other services at low costs and to subsidise free in-credit bank accounts.
"Charges appear high and complex," the Financial Conduct Authority (FCA) said in on Monday.
"Based on the evidence we have to date, we believe there is a case to consider the fundamental reform of unarranged overdrafts and consider whether they should have a place in any modern banking market," it said in a statement.
Debt advisers said banks should copy fees introduced this month by Lloyds (LLOY.L), which has scrapped existing charges for overdrafts and replaced them with a single fee.
The FCA said it would look at the new fee structure.
A separate review of Britain's high-street banking market by the Competition and Markets Authority (CMA) had called for more transparency on overdraft fees but left it to the FCA's broader review of high-cost credit to consider the matter further.
MPs called the CMA's decision a dereliction of duty, with some wanting a cap on unauthorised overdraft fees, a step the FCA signalled on Monday it would not rush into.
The regulator also said it had concerns about how some consumers were using authorised overdrafts as a form of long-term credit.
UK Finance, a banking and finance industry body, said its members were developing ways to make overdraft costs clearer.
But StepChange, a charity that advises people in debt, said it was disappointed no action would be taken on unarranged overdrafts until next year.
"We may at last be hearing the death knell of charges for breaching overdraft limits," said Guy Anker, managing editor at MoneySavingExpert.com, a consumer advocate that wants banks to follow the example set by Lloyds.
The FCA said it would not change the interest rate cap on short-term "payday" loans but would review it in 2020, offering potential relief to a sector which many lenders have quit.
The cap was introduced after criticism from MPs and the Church of England about the very high interest charged by so-called payday loan companies for often vulnerable customers.
The FCA said 760,000 payday borrowers had saved 150 million pounds a year since the cap was introduced in 2015, and that debt charities were seeing fewer customers.
The cap meant some customers would now be better off with a payday loan than an unauthorised overdraft, the FCA said.
The watchdog was publishing feedback to its November review of high-cost credit, which also identified concerns about the rent-to-own lending sector, home-collected credit and credit on goods bought in catalogues.
The FCA will publish any proposed rule changes in early 2018 for public consultation.
The FCA said it was also doing more work on car finance, an area that has drawn close regulatory scrutiny, and would report back in the first quarter of 2018.
Most new car finance is now in the form of personal contract purchase plans provided by the financing arms of automakers.
Reporting by Huw Jones; Editing by Keith Weir and David Clarke