LONDON, April 10 (Reuters) - Britain's financial watchdog may impose changes in how banks treat overdrawn customers after its research showed people are paying too much when they go into the red.
Banking fees have become politically charged, with lawmakers and the government keen for more competition on the high street after a series of mis-selling scandals in financial products. There is also concern over sky-high interest rates charged by payday loan companies.
The Financial Conduct Authority (FCA) said on Thursday it will investigate how banks set and monitor limits to the 8 billion pounds in total that is overdrawn in any given week.
"Just about everybody who banks can have access to some sort of overdraft facility - whether they've signed up for it or not," said Christopher Woolard, director of policy at the FCA, said in a statement.
Overdraft fees generate a third of the revenue from personal account banking in Britain.
"The sheer size of this market is huge and with overdrafts bolted on to over 30 million UK current accounts, we want to make sure it is working well for consumers," Woolard said.
Fees on unarranged overdrafts or when a customer is allowed to withdraw money beyond the arranged limit, are a particular concern, with charges averaging 37 pounds a month, the FCA said.
About 10 percent of Britain's current account holders are permanently or usually overdrawn.
Voluntary measures like annual summaries of charges, sending text messages when a customer is overdrawn, and a buffer zone before charges kick in, have already been introduced but many people are still potentially paying too much, the FCA said.
"As part of these next steps, the FCA will also consider making some voluntary measures mandatory in autumn 2014," the watchdog said.
Consumers tend not to consider overdraft fees when they decide which bank to use so there is little pressure on lenders to provide good value, it said.
Overdraft fees go to the heart of Britain's free banking where customers typically pay no fee for day-to-day banking.
Lenders say overdrafts help pay the cost of providing free banking, but the FCA doubts this.
"There is evidence that personal current accounts help banks to sell a range of more profitable products. One aspect of this is cash savings, which the FCA is currently exploring through a market study," the watchdog said.
Consumer advice charities say overdrafts are common among people seeking help although overdraft debt has been falling since 2010, the FCA said.
The watchdog is also looking to help such vulnerable people by imposing a cap on how much interest payday loan companies can charge from January. (Editing by Hugh Lawson)