Leading article: An unsavoury smell hangs over the high street banks

Britain's high street banks are under an unusual amount of pressure from the regulators. The Financial Ombudsman Service claims that the banking industry's voluntary code of conduct is failing to give consumers adequate protection. And the Office of Fair Trading last week called for banks to give customers 14 days' notice before any levelling any penalty charges.

The level of those charges is also under scrutiny. Last year, credit-card default payments were capped by the Office of Fair Trading at £12, less than half the rate lenders were previously charging. A statement is expected from the OFT soon on what it sees as a fair level for unauthorised overdraft charges. Again, this is likely to be considerably less than banks are charging at present.

Other services offered by the banks are coming under greater scrutiny too. The Competition Commission is to investigate concerns about the promotion of payment protection insurance. And the Financial Ombudsman Service warned this month that a tougher code of conduct is needed to prevent the mis-selling of credit cards and loans, especially to those on low incomes.

All this extra scrutiny is welcome, because an air of unscrupulousness hangs over the commercial banking sector. Nine of the biggest high-street banks are expected to announce combined profits of more than £30bn this year. A substantial slice of this will come from penalty charges. It is estimated that banks charged customers almost £5bn last year for unauthorised overdrafts.

It is clear that banks have pushed their luck in recent years. They are making almost twice as much profit from customers today as they did 10 years ago. Each personal account now brings in around £232 a year, compared with £127 in 1997. Bank charges have increased steeply over this period. Many banks charge £30 a day for going overdrawn without permission. Such fees are manifestly disproportionate, perhaps even illegal.

Yet tougher regulation is only one aspect of the solution. Competition and consumer awareness will also help to bring the banks back into line. Customers are increasingly likely to fight back against excessive charges. And the interesting thing is that banks are backing down. More than 1,000 people have taken complaints about bank or card charges to the Financial Ombudsman Service. And in every case the bank or card issuer has given a refund without contesting the case. The banks appear to be frightened of a decision by the Ombudsman going against them. This strongly suggests that that the banks know that their charges are unjustifiable. This pressure is set to continue. More than a million template letters to help consumers challenge banks on overdraft charges have been downloaded from the websites of consumer rights organisations.

The banks have warned that, if they are unable to levy charges, "free" banking will be unsustainable. We need not take such threats seriously. The industry is clearly profitable, even without charges. Of course, some banks might try to make life difficult for those who reclaim charges. But the solution here is obvious. The customer should open an account elsewhere. The fact is that banks need customers just as much as customers need them.

Historically banks have held a dominant position over their customers. And many bank managers have exploited the instinctive deference of many borrowers. But this is changing. People are utilising their power as consumers. They are beginning to realise that banks are just another high-street service.

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