(Adds lawmaker, consumer group reaction)
By Huw Jones
LONDON, Nov 3 (Reuters) - Britain's financial watchdog will take a fresh look at free-in-credit banking and caps on overdraft fees after lawmakers slammed a competition review for failing to shake up high street lending and protect vulnerable customers.
The Financial Conduct Authority (FCA) faces pressure from lawmakers to intervene in high street banking, a sector dominated by the "big four" - HSBC, Barclays, RBS and Lloyds.
A recommendation from the Competition and Markets Authority in August to inject more competition into retail banking was criticised this week by lawmakers for "passing the buck" to the FCA.
The competition review stopped short of tackling free-in-credit banking, which some lawmakers say pushes up fees for unauthorised overdrafts to pay for it, meaning poorer customers are subsidising better off customers.
The FCA said on Thursday there may be value in looking at retail banking in a more "holistic" way, such as looking at how conduct and competition are affected by the links between different parts of the business model.
"Part of this will include considering free-if-in-credit banking more broadly than was within the scope of the CMA's investigation," the watchdog said in its response to the CMA review.
The CMA has asked lenders to publicise more clearly how much they charge for unauthorised overdrafts, though lawmakers wanted a tougher approach with the FCA itself setting a cap on such fees.
The FCA said it will review in late 2018 how effective the CMA's "contentious" approach has been, and whether a cap is needed. It will also compare overdraft charges with other forms of "high cost" credit.
Andrew Tyrie, chairman of parliament's Treasury Select Committee, said the FCA has acted quickly to pick up the baton dropped by the CMA.
"Additional work on excessive overdraft charges is certainly welcome, but it probably won't be enough unless the consumer is offered meaningful choice in a competitive market," Tyrie said.
StepChange, a charity that helps people with money problems, said there was a clear need to cap overdraft charges now rather than wait until 2018 or later.
Christopher Woolard, executive director of strategy and competition at the FCA, said the FCA's role in regulating banking markets goes beyond the recommendations made by the CMA.
"We will continue to look more broadly at how well these markets work, with a particular focus planned on high-cost credit including overdrafts. We will also be looking at wider retail banking business models," Woolard said.
The TSC will question FCA Chairman John Griffith-Jones about the watchdog's study of business models in a hearing on Tuesday.
Reporting by Huw Jones; editing by Jason Neely and Alexandra Hudson