Regulator cracks down on banks' overdraft charges

A ruling by the Office of Fair Trading will deprive the banking industry - flush with record profits - of up to £1.2bn a year as some lenders are forced to more than halve their penalties.

The decision follows an eight-month investigation by the competition watchdog, which began more narrowly by looking only at the UK's eight largest credit card providers but was extended to the entire banking sector.

The OFT is known to have met with Apacs, the card industry's trade body, 10 days ago, to break the news of its decision, and plans to publicly announce the move before the end of the month. Fees charged for bounced cheques, unauthorised overdrafts and late payments on credit cards will be covered by the new cap.

Revenues from penalty charges are estimated to generate up to £3bn in revenue for lenders and current account providers every year. Lloyds TSB charges £30 a day for customers who bust their overdraft limit, while Coutts Bank levies an uncapped fee of 2 per cent of any outstanding balance on clients who fail to make their payments in time.

A report by moneyexpert.com, the comparison website, showed average bank charges have increased by 30 per cent over the past two years. The average fee for a bounced cheque is more than £32, compared with less than £25 at the end of 2003.

Unpaid standing order and direct debit fees have increased by an average of 13 per cent to more than £31 over the same period. Average fees for late payments on credit cards are between £20 and £25

The OFT's decision to impose a cap has infuriated card providers, many of whom have come to increasingly rely on income from penalty fees after a spate of intense competition in the UK lending market.

The news comes days after the Competition Commission published its final report into store cards, criticising the industry for charging often extortionate interest rates of up to 30 per cent.

The Commission is to insist providers print a wealth warning on customers' statements if they charge an APR of more than 25 per cent, advising them that they could get cheaper credit elsewhere. However, it was criticised by consumer groups for stopping short of imposing a cap on interest rates.