The OFT issued a strongly worded warning to banks such as Northern Rock which have cut interest rates on accounts without giving savers the opportunity to transfer their money to more profitable accounts without penalty.
The OFT is investigating complaints by savers that Northern Rock restructured accounts without warning last month, reducing interest rates, and denied them the freedom to move elsewhere without notice.
But the investigation could be extended to other banks and building societies, the OFT said yesterday. That view was echoed by Leo Finn, Northern Rock's chief executive, who said the issues raised by the OFT were industry-wide.
Northern Rock shares fell 51p to 555p after the warning, wiping more than pounds 200m off the market value, but other banks were also affected, with Lloyds TSB down 32.5p at 861p, Abbey National off 34p at 1047p and Bank of Scotland down 22p to 718p.
The investigation follows complaints about the Northern Rock, after the former building society last month merged 11 accounts into three, reducing interest rates by as much as 3 per cent. Most customers were only informed of the changes on the same day that they took effect.
Notice periods for withdrawing money were also reduced, but they were not abolished, leaving investors with a choice between paying penalties to move their cash immediately or being locked into unattractive interest rates until their notice period expired.
The OFT attacked the practice in an exceptionally toughly worded statement. "Customers do not expect banks to change arbitrarily the nature of a product, lock them into less favourable terms and conditions, fail to give adequate warning of any changes, and treat some account holders differently from others," John Bridgeman, director general, said.
If the case is proved, banks which fail to amend their rules would be taken to court, but the OFT believes that banks should take immediate steps to changes their rules and compensate investors who feel they have already suffered financial losses.
"Unfair contract terms have no place in modern banking and should be removed without delay. They are in any case unenforceable in law," the OFT said. Mr Bridgeman opened the way to savers to seek redress if they felt they had suffered loss. "Customers do not need a ruling on fairness from the OFT to challenge such terms or seek redress if they feel they have suffered loss," the statement said.
Northern Rock believes it has been unfairly pilloried because it abandoned the traditional practice of publishing its plans to cut interest rates and restructure accounts in the media and unilaterally took the decision to notify customers directly of the changes it planned to make in the interests of customer relations. In doing so it attracted high-profile criticism which other banks have avoided.
The outcome of the investigation is likely to have a major effect on the rules governing deposit accounts in general and notice accounts in particular. Banks and building societies may be obliged to give account- holders the same notice of a proposed cut in interest rates as they require from savers for penalty-free withdrawals. If so institutions may further reduce the length of notice needed to withdraw cash from notice accounts, or replace them with fixed rate accounts which tie investors in for a fixed period.
The rules could be changed to require investors to be informed personally of rates changes, although that would be cumbersome and costly, Northern Rock said.