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The monthly cost of an unarranged overdraft will be capped for personal current accounts under proposals set out by the competition watchdog.

The Competition and Markets Authority (CMA) has proposed requiring banks to set a monthly maximum charge for unarranged overdrafts as part of a range of recommendations on how to tackle problems in the current account and business banking sectors.

The CMA said that in 2014, £1.2 billion of banks’ revenues came from unarranged overdraft charges. The CMA also wants banks to alert people when they are going into an unarranged overdraft and give them time to avoid the charges as at present, customers may not even be aware they have slipped into an overdraft that has not been pre-arranged with their bank.

The watchdog said its package of provisional remedies could bring benefits to bank customers to the tune of £1 billion over five years. To transform the market, it also said that banks should be made to provide their customers with the right information so thay can easily find out which provider and type of account may offer the best value for them.

It said new online comparison tools should be developed to help customers do this and the current account switching service should be improved to give customers more awareness and confidence in the switching process. The service was introduced in 2013 and has cut the length of time it takes to switch to seven days, from up to 30 days previously.

The watchdog also wants to make it easier for SMEs (small and medium enterprises) to shop around for better banking services.

It said the prices and availability of loans should be made more transparent so that the majority of SMEs need not, as is the case now, turn directly to their existing bank for finance without considering other offers.

At present, it is hard for bank customers to work out if they are getting good value, the watchdog said. Bank charges are “complicated and opaque” and many customers see switching banks as “risky”.

Nearly 60% of personal customers have stayed with the same bank for more than 10 years and over 90% of SMEs get their business loans from the bank where they have their current account.

This means that banks do not need to work hard enough to compete for customers on price or quality of service, the CMA said.

Already, if personal customers switched to a cheaper deal for their needs, the annual savings could be on average £116 – ranging from £89 on average for customers who do not use an overdraft, to £153 on average for overdraft users.

The CMA said banks should be made to regularly prompt their customers to check that they are getting good value from their banking provider, directing customers to digital comparison services which can help them compare deals, based on their needs.

The watchdog has rejected the idea of breaking up the biggest banks, saying that creating more small banks would not tackle fundamental competition problems as it would not address the lack of transparency over banks’ fees and charges.

The CMA also stopped short of getting rid of “free if in credit” current accounts, which make up around three-quarters of current accounts.

In reality these accounts are not “free” as customers pay for them through overdraft charges and foregone interest that they could have received elsewhere.

Alasdair Smith, chairman of the retail banking investigation, said: “For too long, banks have been able to sit back and not work hard enough for their personal and small business customers. “We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks.

“They will also protect those who fall into overdraft from being stung with unexpected fees.”

Mr Smith said the proposed remedies will allow newer entrants to show people exactly how what they have to offer compares with their current deal.

He continued: “Our package of banking reforms will help new competitors get a stronger foothold in a market which is of vital importance to the whole economy.”

The CMA said responses to its proposals should be submitted by June 7.

Under the CMA’s recommendations, it would be up to banks to come up with their own level of cost cap when making charges for unarranged overdrafts.

It is hoped this would encourage banks to be more competitive, as it would be easier for customers to see if they could pay cheaper charges by going elsewhere. Whereas if a single cost cap were set for unarranged overdraft costs, all banks could end up charging this, rather than competing to offer cheaper charges.

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