Banks have dodged rules aimed at cracking down on expensive overdrafts by replacing regular fees with a whopping annual interest rate of 40%.

It means people who run out of money will pay £39.90 for each £100 borrowed in an overdraft for a whole year, as opposed to a monthly or daily fee of around £5-£6.

The new rate was set after Britain’s financial watchdog called for an overhaul of the system, including the practice of charging more for unplanned overdrafts.

The Financial Conduct Authority (FCA) asked firms to replace ‘confusing and excessive’ charges with a simple annual interest rate to make overdraft pricing fairer.

However, that appears to have backfired with Britain’s major financiers finding a new way to rip people off.

After Nationwide set its rate to an expensive 39.9%, most of country’s banks followed suit, in a move that could mean some people will pay two or three times more.

Moneyexpert Martin Lewis warned that people trapped in with high amounts of authorised overdrafts will be hit the hardest.

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For example, someone with a £2,000 authorised limit could see their payback costs more than triple under the new rules, from around £180 a year to £680.

Amid fears steep overdraft charges will become ‘the new normal’, the FCA is asking banks to explain their pricing decisions.

A letter written to banks today asked firms to reduce or waive interest for customers who are in financial difficulty because of their overdraft.

The City regulator also asked how companies will deal with any customers who could be worse off following the changes.

Mr Lewis said the probe was a ‘slap on the wrist for the banks’  and an admission the FCA changes haven’t worked ‘as entirely as they wanted’.

An investigation by the watchdog previously found unarranged overdraft fees are often 10 times as high as charges for payday loans, and fall disproportionately on vulnerable consumers.

It hoped that under the new rules,  the cost of borrowing £100 through an unauthorised overdraft would fall from a typical £5 per day to around 10p per day.

Chief executive at the FCA Christopher Woolard,  maintained that seven in 10 customers would still be better off or unaffected by the 40% interest rate.

Banks such as HSBC have also quoted this statistic when defending the new system.

What are the changes?

Among the changes that have already been announced, Lloyds Banking Group customers are to be charged new ‘personalised’ overdraft rates of up to 49.9% from April.

HSBC, First Direct and M&S Bank will all introduce rates of 39.9% from March 14.

NatWest will charge up to 39.49% for overdraft borrowing and Barclays will introduce a new overdraft rate of 35%.

TSB will charge customers 39.9% from April.

Nationwide Building Society has already imposed a single rate of 39.9% across its adult current account range.

But Simon Lambert, editor of This is Money, said this still meant a third of people would be worse off.

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He also branded the figure  ‘disingenuous’ as it includes unauthorised overdraft charges, when most people are on pre-planned overdrafts.

Experts in the financial sector predict the FCA could step things up a notch and cap princes of overdraft charges, if banks don’t do more to help customers.

The regulator has encouraged customers to write to their banks and make a complaint about their affordable overdraft charges

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