The Financial Conduct Authority (FCA) will review whether the cap on interest rates applied to payday loans should be changed and will also investigate the charge banks apply to unarranged overdrafts.
The payday loan cap was introduced almost two years ago, after the Church of England and MPs voiced concerns high interest rates could be severely damaging to already vulnerable people who are forced to resort to a payday loan to make ends meet.
However, the cap has also received criticism, with some suggesting it would only increase the number of people turning to so-called "loan sharks".
The financial watchdog said the review, is part of a thorough examination of the "high cost credit" market, a term used to define a number of credit forms such as pawn-broking, payday loans, home-collected and catalogue credit and logbook loans.
The review, whose findings will be published in the summer of 2017, is aimed at assessing whether any major policy changes are needed.
"The FCA will assess whether there is evidence that suggests that the cap should be changed," the regulator said in a statement on Tuesday (29 November).
"The FCA is also keen to see if there is any evidence of consumers turning to illegal money lenders directly as a result of being excluded from high cost credit because of the price cap."
The watchdog will also look in detail at charges lenders apply on unarranged bank overdrafts, after the Competition and Markets Authority received scathing criticism from MPs for failing to control high fees on unarranged bank overdraft.
"The FCA will look in more detail at overdrafts from a consumer protection, as well as a competition perspective, using its full range of powers," the FCA added.