The Competition and Markets Authority says this and other measures could save bank customers £1bn over five years.
The provisional conclusions of the 18-month study into personal and business banking suggest competition is weak in the banking industry.
But consumer group Which? said the report was a missed opportunity.
Many banks already cap their overdraft fees, but the CMA said some do not.
HSBC charges a maximum fee of £80 a month, for example, while Royal Bank of Scotland charges a maximum of £90.
The average unauthorised overdraft fee – when the bank has not agreed to a customer going overdrawn – is £57.50 a month, according to Moneyfacts.
If someone were to go overdrawn every month, they could therefore pay as much as £690 a year. Interest is charged daily on top of that, at an average annual rate of 12.85 per cent
The CMA said that UK banks made £1.2bn from such charges in 2014.
‘Weak’ competition
The CMA said it was hard for customers to work out whether they were getting good value from their banks because charges were so complicated. In addition, many customers thought it was difficult and risky to change banks.
As a result, the watchdog said nearly half of consumers had stayed with their bank for more than 10 years and nearly 40 per cent for more than 20 years.
That is despite the CMA finding that current account customers could save up to £260 a year by switching to a better deal.
It also found more than 90% of small and medium-sized companies took out business loans with the bank where they held their current account.
The CMA confirmed its earlier finding that the biggest banks should not be broken up, as that would not “significantly improve” the market.
Market ‘not working’
Alasdair Smith, chair 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.”
The CMA also proposed plans to “push” the development of new online comparison services and improve the current account switch service (CASS) to make it easier to switch banks.
Mr Smith told BBC Radio 4’s Today programme: “The banking market is not working well for customers or for small businesses at the moment, primarily because it’s very hard for customers to work out what their bank really costs them.”
The CMA wanted to “revolutionise” the quality of information, which would go “much further” than price comparison websites, he added.
He said that the best bank for someone depended on how they used their bank account, so technology would put together information about an individual’s bank usage and charges and point people in the right direction of better offers.
‘Missed chance’
However, consumer group Which? criticised the findings of the inquiry.
Alex Neill, Which? director of policy and campaigns, said: “After 18 months, this inquiry achieved little more than to propose basic information measures that the big banks should have introduced years ago.
“Steps to stimulate switching are welcome but the chance to deliver better banking for all consumers has been missed,” she added.
She said the Financial Conduct Authority should “tackle the unfair, punitive charges faced by unauthorised overdraft users, some of whom are hit with fees far in excess of payday loans.”
Paul Pester, the chief executive of TSB, said: “Today’s report falls a long way short of introducing the radical reforms the banking industry needs.
“The CMA has missed a golden opportunity and is on its way to short-changing millions of Brits by failing to go far enough in its measures to break the stranglehold of the ‘Big Five’.”
