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Watchdog attacks the bank’s £165 charge for falling into the red

Lloyds TSB was named last week as the worst offender for punishing customers who fall briefly into the red.

Those in the Lloyds TSB Classic Plus account who exceed their agreed overdraft limit by £50 for two weeks are charged £165, finance website Moneynet.co.uk reports. This compares with HSBC’s £25.10 charge and £30.52 by Barclays. Alliance & Leicester, second after Lloyds, charges £95.

A damning report by the Office of Fair Trading (OFT) last week said that banks rake in about £8.3 billion from current account charges. The charges are equivalent to £152 per account and represent greater income than savings and credit cards combined.

The report also accuses banks of being opaque about how they derive revenue from accounts, confusing customers and making it difficult to compare deals.

John Fingleton, OFT chief executive, said: “Personal current accounts are a vital gateway to effective participation in the economy. But this market is not serving consumers well.”

Meanwhile, the OFT has taken banks to court over the legality of overdraft charges, although banks are appealing against the court’s verdict that they come within the OFT’s remit. A second hearing on whether the charges are unfair and what a fair charge would be has been delayed until the appeal is heard.

The OFT was particularly critical of lenders that charge a high interest on overdrafts, but offer negligible or no interest on current accounts. Fingleton said these were “a type of stealth payment”.

The report says banks make almost twice as much from paying poor in credit rates to customers than they make in levying charges. Income generated from not paying higher rates of interest is estimated at £4.6 billion, while charges associated with insufficient funds are £2.6 billion, it says.

First Direct, Barclays and the Co-op do not pay interest on current accounts, while Royal Bank of Scotland and NatWest pay only 0.1%.

Michelle Slade, analyst at Moneyfacts.co.uk, the comparison site, said: “The fact that these institutions pay no or little credit interest is disgraceful. With inflation as high as it is, anyone with money with these banks is effectively losing money.”

The best interest rate is Alliance & Leicester’s Premier Direct account. It pays 8.19% on balances up to £2,500 but 0.1% on sums above this. At least £500 has to be paid into the account each month.

Cahoot pays 3.69%, the highest in-credit interest rate without any catches. If you want a chequebook with the account, the rate is 3.59%.

Bank charges for those regularly in the red rose by 17% between 2003 and 2007, the OFT reported. About 12.6 million accounts, or 23% of UK accounts, incurred at least one unauthorised overdraft charge in 2006. Such people should choose an account with a low overdraft rate. Norwich & Peterborough building society offers 0% on authorised overdrafts for six months, then charges 7.74%.

Most bank customers are unsure how bank charges work. Moneyexpert, a comparison website, said 71% of customers described bank charges as unclear. Only 17% understood the charges.

Moneyexpert said: “One logical conclusion of the OFT report would be to remove the less visible fees imposed by banks and replace them with simple monthly charges similar to the existing ‘packaged account’ model.”

However, it is feared that a crackdown on charges would result in the end of “free” banking. A spokesman said: “If and when the decision is made to cap the unauthorised overdraft fees and unpaid charges it is inevitable that we will move towards paying monthly or annual fees for our personal banking.”

Angela Knight, chief executive of the British Bankers Association, said: “Yes, you can incur charges if you do things without making arrangements first, but do you really want to pay for ATM use, pay for statements, pay for direct debits in this country?

“Surely people don’t. The Office of Fair Trading unfortunately does need to perhaps look at that balance as far as its report is concerned.”

Lloyds TSB dismissed the Moneynet study.

A spokesman said: “The most common scenario for our customers is to be overdrawn for only one day, in which case they would be better off with us than with many of our competitors.”

The OFT study began in April last year.

In 2001 the Cruickshank Report said that savers were not adequately informed and found financial products difficult to compare.

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