Britain’s banks took a well deserved kicking from the Financial Conduct Authority (FCA) this morning, when it finally called time on the rip-off overdraft charges that act as lead weights tied to the ankles of those who are financially struggling. 

Some of the fees imposed by banks make this form of credit more expensive than payday loans. They can reach 10 per cent a day. Payday loans are capped at 0.8 per cent.

The comparison is apt. Prior to the imposition of the cap, they levied absurd charges because they could. 

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Many of their clients had nowhere else to go. Cheaper forms of borrowing were denied to them. 

The same is largely true of the way banks have acted towards those who go overdrawn. 

Overdrafts generate £2.4bn a year in profit for banks, £700m of which is brought in by unauthorised overdrafts. As always seems to be the way, this money comes disproportionately from the poorest sections of society. 

A common argument against reform from the banks and their allies is that such a move will hit free in-credit banking, forcing banks to impose new charges. Critics say the FCA’s new regime will punish the financially responsible at the expense of the financially irresponsible. 

A wider, less well publicised, FCA piece of research on retail banking exposes this as tommyrot. Overdrafts contribute about a third of banks’ profits from current accounts. The rest comes through lending out the money held on deposit in current accounts. 

What is characterised as free banking isn’t really free at all. Customers are in effect lending the banks their money, which it then lends to others at much higher rates. The gap between the two represents the banks’ margins. They have been growing nicely at institutions such as Lloyds. 

Through limiting what people have to pay, and making the banks spell out what they are charging, the FCA has made a welcome move against what has amounted to profiteering. 

It has listened to the industry’s moaning and wailing and chosen to ignore it. Consumer groups were positively gushing in response, which tells you all you need to know. It’s not often that they react to FCA announcements like football fans after a goal. 

Perhaps the only real criticism that can be tabled is that this has taken an awfully long time to get done. But better late than never. 

However, there may be a cloud on the horizon. As investment platform AJ Bell pointed out, Britons have around £6.5bn in overdraft borrowing and are increasingly shifting this to credit cards. These accounts also charge a pretty penny. 

The FCA’s reforms are to be greatly welcomed. But they won’t fix Britain’s dangerous addiction to overpriced debt.

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