The FCA has announced new proposals that are designed to protect millions of consumers who use overdrafts and high-cost credit, giving them greater control over their finances and reduce their costs.

In the announcement, the FCA stated that the way banks “operate and charge for overdrafts needs fundamental reform”, with firms profiting from an estimated £2.3bn in 2016, with 30 per cent of this total earned from unarranged overdrafts. The regulator revealed that the majority of unarranged overdraft charges are paid by just 1.5% of customers, who pay roughly £450 per year in fees and charges.

The immediate proposals put forward by the FCA could allegedly save customers up to £140m a year.

Other mandatory rules being considered surrounding overdrafts involve mobile alerts to warn consumers of potential overdraft charges, the introduction of online tools to assess consumer eligibility and no-longer including the value of an overdraft in the term ‘available funds’.

FCA chief executive Andrew Bailey said: “'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.”

Furthermore, the FCA looked at the rent-to-own sector during its review, claiming that the costs for the 400,000 customers can be “exceptionally” high, with some people paying over £1,500 for essentials such as an electric cooker, which could be purchased on the high street for less than £300.

“The FCA believes the harm identified in this market is sufficient in principle to consider a cap on rent-to-own prices. It will now carry out the detailed assessment of the impact that a cap could have on the rent-to-own sector and how it might be structured,” the regulator said.

If the proposed changes are deemed appropriate, they could be introduced by April 2019.

“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,” Bailey said.

UK Finance personal finance managing director Eric Leenders also commented on the FCA’s proposal, stating: “People up and down the country use credit as a helpful means of managing their everyday spending, so we have been working closely with the regulator to develop alerts for customers who may be about to slip into the red as well as a range of prompts that make it much easier to keep on top of finances and reduce costs. The industry is also introducing proactive support where persistent use of an overdraft facility might be a symptom of financial difficulty. We will continue to work closely with the FCA to make overdrafts more transparent and ensure customers take full advantage of the banking services available to them.”

“Debt is terrifyingly popular in the UK, with close to 13 million adults in the UK overdrawn in 2017 and 3.1 million of those either exceeding their overdraft limit or never arranging one,” said Quilter responsible business director Jane Goodland.

“There are many reasons why people end up in debt and use expensive credit products. But a contributing factor is undoubtedly a lack of financial capability. Too many people struggle to plan ahead and take control of their financial choices by making informed decisions, and bury their head in the sand. This can easily become problematic. To counter this, we need to make sure people are empowered to take control of their finances, and feel confident making careful and deliberate choices about money.”

Following the introduction of a breathing space scheme, a cap on payday loans and a ban on pension cold calling, Goodland states that the “time has come for the government to stop treating the symptoms and turn its attention to finding a cure”, and suggests that financial education is the “key” to this.

“Financial education is key and it needs to start from a young age, as one in nine 18 24 year olds are already in financial difficulty,” Goodland concluded.

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