High overdraft fees and lower interest rates allow the UK’s biggest banks to generate as much as half of their current accounts profits from just 10 per cent of customers, according to a review that will heighten calls for a clampdown on unfair fees.

In an update on Wednesday to its review into retail banking business models, the Financial Conduct Authority said that Britain’s biggest banks benefit from a “captive audience” of customers who are reluctant to switch and can be cross-sold other products, often at worse rates than they could get elsewhere.

Andrew Bailey, chief executive of the FCA, said the report “provides more evidence that there is no such thing as free banking”, and will inform the regulator’s work to reform overdraft rules.

Overdraft fees and charges provide about 30 per cent of the total profit generated by current accounts, the FCA said. Just 2 per cent of accounts pay more than half of all overdraft charges, highlighting the extent to which a small number of account holders subsidise the wider provision of free-in-credit accounts.

Responding to the report, Dan Cooper, UK head of banking and capital markets at EY, said: “This is positive and the industry should be in no doubt of the regulator’s determination to drive significant change.”

But he added: “Until consumer perceptions around [free banking] change, challenges around charges will remain.”

Last month, the FCA called for a “radical overhaul” of rules surrounding high-cost credit. It has already outlined plans to give customers more transparent information about overdrafts that it thinks will save customers about £200m a year, but has said it will consider more fundamental changes later this year.

Despite repeated pushes to increase competition and encourage new entrants to the banking sector, the current account market is now more concentrated than before the financial crisis, with the six largest providers — Barclays, Lloyds Banking Group, HSBC, Royal Bank of Scotland, Santander and Nationwide — controlling almost 90 per cent of the market.

The FCA said that in addition to income from overdraft charges, the biggest banks also benefit from cheaper funding thanks to large numbers of zero interest current accounts and savings accounts that pay lower interest rates than their smaller rivals.

The regulator said the next stage of its review will consider factors that could change the outlook for the retail banking market, such as Open Banking rules. It will also investigate the impact of branch closures on vulnerable customers.

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