Squash some bank charges and others rise up in their place

As the watchdog prowls, current account customers suffer

The Office of Fair Trading (OFT) is digging deep.

A third of the way into a fact-finding exercise to gauge the justice - or otherwise - of £30 penalties on current accounts, the regulator is still sifting through reams of information about bank charges.

It plans to report back before Christmas on the penalties for customers who don't seek authorisation before going into the red - whether it's a direct debit paid without sufficient funds, a bounced cheque or a breach of an agreed overdraft.

If it finds enough to suggest that bank fines are unfairly large, the OFT will instigate an in-depth study. This could lead - as it did with the recent investigation into credit cards - to demands that fees be slashed.

That would be a heavy blow for the banks: earlier this year, a report by investment bank Credit Suisse estimated that the fees generate £2bn a year.

Although £30 is an average, they can be as high as £38 at NatWest for a bounced cheque.

Consumer champion Which? has encouraged consumers to challenge the size of the fees in the small claims court, claiming they're illegal and don't represent the real cost to the financial institutions.

In many cases so far, high-street banks have backed down and settled out of court. But concern is now growing that they will try to sting customers with other charges, in anticipation of lost revenue in the future.

A recent report by accountancy firm Price-waterhouseCoopers on the credit card market warned of this "waterbed effect". It offered a vision of how the lower penalty payments forced on lenders are simply recouped elsewhere.

This is already happening with cards. After the OFT halved late-payment fees to £12, providers introduced uncapped balance-transfer fees, higher annual percentage rates (APRs) and changes in the repayment order so that expensive debt racked up extra interest.

With current accounts, banks are expected to move early rather than wait for the fallout from an unfavourable OFT conclusion.

On the radar already is Lloyds TSB: on 1 November, it ushers in current account changes that will punish many customers.

This move is significant since it has the biggest slice of the current account market, with millions of Britons paying their salary into Lloyds TSB accounts.

A list of the bank's changes, outlined in recent letters to customers, reveals the scope of its efforts to raise money. First, a £10 buffer fee for agreed overdrafts will be abolished. Dip over your limit by as little as £1 and you'll be hit with a £30 fee.

Next up is the cancellation of a "waiver" service. At the moment, customers who have not gone overdrawn within a 12-month period are spared any charges the first time they do fall from grace; from 1 November, they'll have to cough up £30.

However, exceptions are made for students and those prepared to pay service fees for a Premier or Platinum Lloyds TSB account. These customers can still breach their overdraft and not have to worry about penalties.

At least the bank is drawing the line somewhere, though, as no more than three separate charges will apply in any one month. So the most people will have to pay is three times the £35 fee for a"bounced item" - £105.

A Lloyds TSB spokes- woman denies that the charges relate to the watchdog's inquiry. "This is nothing to do with OFT changes; we regularly review what customers want and how we appoint these things.

"They only affect those who go into unauthorised borrowing."

Nick White of the price-comparison website uSwitch.com disagrees. He brands the new policy as "another tactic to boost revenue before any OFT investigation".

Other banks are expected to follow suit.

Andrew Hagger of financial analyst Moneyfacts sees the banks' moves as pre-emptive strikes. "It's different from the credit card investigation. With the current account inquiry, banks are getting in first; with credit cards, they got in afterwards."

Mr Hagger describes Lloyds TSB's abolition of the overdraft fee waiver as a "bold statement. If you're a customer, how are you going to feel about that?"

A spokesman for the OFT won't comment on any individual bank's behaviour but stresses that as long as their behaviour is transparent "and consumers can see what is going on", then that is acceptable.

"It might be a chore but it's worth checking the terms and conditions of your current account ," says a Which? spokesman. "With all the changes going on, it will be worth watching out for those banks that don't penalise their customers, and switching to them."

As well as changes such as those at Lloyds TSB, look out in particular for announcements about overdraft rates and interest on balances in credit.

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