Bank charges to soar as lenders try to recoup £3bn cost of OFT ruling

Britain's biggest banks have begun a desperate attempt to replace billions of pounds of revenue they expect to lose next year under a regulatory crackdown. Consumer groups warned yesterday that almost all leading banks have started to increase overdraft rates and other charges before new rules come in that could cost them more than £3bn a year.

The warnings followed the decision yesterday by Lloyds TSB, Britain's biggest current account provider, to raise its overdraft interest rates for the second time in three months.

Many of Lloyds' rivals have already made similar moves. NatWest has also introduced higher overdraft rates. Two weeks ago, First Direct, the internet and phone-based bank, said it would introduce a £10 monthly fee for its current accounts, payable by customers who pay in less than £1,500 a month.

The crisis has been caused by a ruling in May from the Office of Fair Trading. The OFT said credit card companies that charged borrowers more than £12 for paying bills late or exceeding borrowing limits were breaking the law. It has since announced an identical investigation into fees charged by the banking sector - the review is expected to conclude next year with a similar crackdown.

Under consumer protection laws, lenders are not allowed to charge more than the costs they have actually incurred when processing late payments or credit limit breaches. The OFT is expected to say that banks charging more than £12 for unauthorised overdrafts or bounced cheques - the maximum it estimates such transactions cost - have therefore been behaving illegally.

Such fees have become increasingly important to the banks, which often levy more than three times the caps expected from the OFT and can apply new charges every day.

Which?, the consumer group, estimates that Britain's biggest banks earned £4.7bn from unauthorised overdraft charges last year alone. Up to two-thirds of that revenue could disappear after an OFT ruling.

Nick White, head of personal finance at the price comparison service uSwitch, accused the banks of deliberately raising charges and rates to head off the threat posed by the OFT action.

"I find it very hard to believe that the OFT will not follow what they have done with credit cards. The banks see it coming and are anticipating this by implementing changes now," said Mr White.

Cahoot doubts

The future of Cahoot, the internet bank launched by Abbey six years ago, was in doubt yesterday after it told thousands of customers they might be better off moving their loan accounts elsewhere.

In a letter to customers warning them that the cost of its flexible loan is to increase sharply, from 9.1 per cent today to 14.9 per cent later this month, Cahoot invited borrowers to move their accounts to Abbey's own loans division.

Cahoot decided to stop offering personal loans and credit cards to new customers at the end of September, after a review by Santander, the Spanish bank that bought the Abbey group two years ago. The flexible loan was until yesterday one of Cahoot's few remaining competitive products, prompting fears that the business is being run down.

David Prosser