UK watchdog threatens tougher action on bank overdraft fees

By Huw Jones

LONDON, April 10 (Reuters) - Britain's financial watchdogmay impose changes in how banks treat overdrawn customers afterits research showed people are paying too much when they go intothe red.

Banking fees have become politically charged, with lawmakersand the government keen for more competition on the high streetafter a series of mis-selling scandals in financial products.There is also concern over sky-high interest rates charged bypayday loan companies.

The Financial Conduct Authority (FCA) said on Thursday itwill investigate how banks set and monitor limits to the 8billion pounds in total that is overdrawn in any given week.

"Just about everybody who banks can have access to some sortof overdraft facility - whether they've signed up for it ornot," said Christopher Woolard, director of policy at the FCA,said in a statement.

Overdraft fees generate a third of the revenue from personalaccount banking in Britain.

"The sheer size of this market is huge and with overdraftsbolted on to over 30 million UK current accounts, we want tomake sure it is working well for consumers," Woolard said.

Fees on unarranged overdrafts or when a customer is allowedto withdraw money beyond the arranged limit, are a particularconcern, with charges averaging 37 pounds a month, the FCA said.

About 10 percent of Britain's current account holders arepermanently or usually overdrawn.

Voluntary measures like annual summaries of charges, sendingtext messages when a customer is overdrawn, and a buffer zonebefore charges kick in, have already been introduced but manypeople are still potentially paying too much, the FCA said.

"As part of these next steps, the FCA will also considermaking some voluntary measures mandatory in autumn 2014," thewatchdog said.

Consumers tend not to consider overdraft fees when theydecide which bank to use so there is little pressure on lendersto provide good value, it said.

Overdraft fees go to the heart of Britain's free bankingwhere customers typically pay no fee for day-to-day banking.

Lenders say overdrafts help pay the cost of providing freebanking, but the FCA doubts this.

"There is evidence that personal current accounts help banksto sell a range of more profitable products. One aspect of thisis cash savings, which the FCA is currently exploring through amarket study," the watchdog said.

Consumer advice charities say overdrafts are common amongpeople seeking help although overdraft debt has been fallingsince 2010, the FCA said.

The watchdog is also looking to help such vulnerable peopleby imposing a cap on how much interest payday loan companies cancharge from January. (Editing by Hugh Lawson)