The Australian Securities and Investments Commission has recommended ANZ, Bendigo and Adelaide Bank, Commonwealth Bank and Westpac must pay back millions to customers to remedy the fee damage caused to First Nations customers on low incomes.

More than $28 million will be refunded after major banks were found to have overcharged low-income Australians who should have had low-fee accounts, the market watchdog says.

ANZ, Bendigo and Adelaide Bank, Commonwealth Bank and Westpac kept at least 2 million people in high-fee accounts with steep dishonour and overdraw charges when they could least afford it, ASIC found.

According to the Better Banking for Indigenous Consumers report released on Monday, most banks also had difficult “opt-in” processes for switching to no- or low-fee options, including making some consumers travel hundreds of kilometres to their nearest branch.

ASIC Commissioner Alan Kirkland says the banks knew low-income customers had the wrong accounts.

Commissioner Kirkland said the banks had “caused financial distress through avoidable fees and complicated bank processes”, despite being able to identify these customers as receiving government payments.

Under the banking code, customers who receive government concession payments and qualify for a Commonwealth Seniors Health Card, Health Care Card or Pensioner Concession Card are entitled to basic, no- or low-fee accounts.

The crackdown on fee harm has forced the banks to commit to moving more than 200,000 people into low-fee accounts, saving these customers an estimated $10.7 million in future yearly savings.

“Banks knew that many of these customers on low incomes were in inappropriate high-fee accounts, and it has taken ASIC’s intervention to force them to act,” Mr Kirkland said.

One of the worst examples of fee harm was an ANZ low-income customer who was charged $3,606 in dishonour fees.

But it was Commonwealth Bank that had the most high-fee accounts held by the low-income customers in the study.

Low-income earners in Alice Springs were more likely to be ripped off by the banks, the report found.

In the troubled Alice Springs area, which has one of the largest postcodes by area and is one of the most disadvantaged in Australia, low-income customers were more likely to be charged excessive fees than in any other region.

A total of 3,054 low-income Alice Springs customers of the four banks were collectively charged more than $200,000 in fees, mostly overdraw ($115,325) and dishonour fees ($37,674).

A disability support pensioner from regional NSW was charged more than $2,280 in dishonour fees in one year, while a person on a Centrelink carer’s payment was charged $1,772 in account-keeping fees.

One student on Abstudy will be refunded $3,625 for dishonour fees that could have been avoided on a low-fee account.

“We expect all banks — not just those we reviewed for this report — to consider these findings, improve the accessibility and distribution of low-fee accounts and commit adequate resourcing to specialist First Nations services,” Commissioner Kirkland said.

Banks must also change their processes to automatically switch customers to a low-fee account without needing to attend a branch in person with proof of a concession card.