The sting in the tale of low charges

Banks are wooing new customers while the old ones suffer

In the last few weeks, a number of the UK's biggest banks and insurance companies have cut charges to historic lows whilst also boosting the interest they pay on current accounts, but there are hidden stings in the tail of this otherwise good news story.

In the last few weeks, a number of the UK's biggest banks and insurance companies have cut charges to historic lows whilst also boosting the interest they pay on current accounts, but there are hidden stings in the tail of this otherwise good news story.

For instance, Halifax announced last week that it would pay 4 per cent interest on its current account, but it later emerged that half of the former building society's customers would face an unpleasant double-whammy. They will not qualify for its new current account, which will pay dramatically more interest than is available on the high street. They will also be faced with higher charges on their existing account.

The move to boost introductory rates is widespread, with banks and building societies facing unprecedented levels of competition for new customers. This has led to a situation where attractive headline rates are offered to new customers, while existing ones are left languishing in worse accounts.

The new current account at Halifax is theoretically open to everyone - old and new customers alike. Yet customers must pay a minimum of £1,000 into it each month, or maintain a balance of at least £500 in order to receive the 4 per cent interest. Halifax's existing two million current-account holders face no such minimum requirements.

In addition, they will see the agreed overdraft rate on the existing Halifax current account rise from 14.2 per cent to 19.6 per cent and will have to pay a new monthly £5 charge if they go overdrawn. Halifax has pointed out that these charges are no worse than those at most high-street banks, and the differentiated rates were designed to motivate more of its customers with multiple current accounts to have their primary account with Halifax rather than a competitor.

But consumer groups have criticised the move. Melanie Green, a senior researcher for the consumer magazine Which? said: "Even if this affects (only) a quarter of Halifax customers, in the end it is unacceptable. This practice is shocking and does not reward the many customers who have stayed loyal to their bank or building society."

Across the industry, existing customers can usually move over to a new rate, but often they are not made aware of newer, better offers by their banks. Under the Banking Code, banks are obliged to notify customers if they introduce an account with very similar conditions like charges, interest rates and access.

But the Code does not require banks to make people aware of new accounts that would generally be considered better deals but which have different conditions, apart from in a once-a-year letter to all customers detailing products on offer. Lloyds TSB, Barclays and NatWest all comply with this, and put adverts in newspapers and leaflets in branches about new products.

But this compares starkly with effort invested in attracting new customers. Available to customers who transfer to Lloyds, but not to its own customers, is a "Switchers Package", with a six-months free overdraft and other benefits.

The internet banks Cahoot and Smile have said they will notify all customers of new products. So far, both banks have the same range of accounts as when they were launched.