(Adds lawmaker, consumer group reaction)
By Huw Jones
LONDON, Nov 3 (Reuters) - Britain's financial watchdog willtake a fresh look at free-in-credit banking and caps onoverdraft fees after lawmakers slammed a competition review forfailing to shake up high street lending and protect vulnerablecustomers.
The Financial Conduct Authority (FCA) faces pressure fromlawmakers to intervene in high street banking, a sectordominated by the "big four" - HSBC, Barclays, RBS and Lloyds.
A recommendation from the Competition and Markets Authorityin August to inject more competition into retail banking wascriticised this week by lawmakers for "passing the buck" to theFCA.
The competition review stopped short of tacklingfree-in-credit banking, which some lawmakers say pushes up feesfor unauthorised overdrafts to pay for it, meaning poorercustomers are subsidising better off customers.
The FCA said on Thursday there may be value in looking atretail banking in a more "holistic" way, such as looking at howconduct and competition are affected by the links betweendifferent parts of the business model.
"Part of this will include considering free-if-in-creditbanking more broadly than was within the scope of the CMA'sinvestigation," the watchdog said in its response to the CMAreview.
The CMA has asked lenders to publicise more clearly how muchthey charge for unauthorised overdrafts, though lawmakers wanteda tougher approach with the FCA itself setting a cap on suchfees.
The FCA said it will review in late 2018 how effective theCMA's "contentious" approach has been, and whether a cap isneeded. It will also compare overdraft charges with other formsof "high cost" credit.
Andrew Tyrie, chairman of parliament's Treasury SelectCommittee, said the FCA has acted quickly to pick up the batondropped by the CMA.
"Additional work on excessive overdraft charges is certainlywelcome, but it probably won't be enough unless the consumer isoffered 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 ratherthan wait until 2018 or later.
Christopher Woolard, executive director of strategy andcompetition at the FCA, said the FCA's role in regulatingbanking markets goes beyond the recommendations made by the CMA.
"We will continue to look more broadly at how well thesemarkets work, with a particular focus planned on high-costcredit including overdrafts. We will also be looking at widerretail banking business models," Woolard said.
The TSC will question FCA Chairman John Griffith-Jones aboutthe watchdog's study of business models in a hearing on Tuesday.
(Reporting by Huw Jones; editing by Jason Neely and AlexandraHudson)