Banks threaten to end free banking as £8bn 'stealth charges' are curbed

Banks yesterday threatened an end to free current accounts after they were accused of dirty tricks, ripping off customers and imposing stealth charges.

The warning of the death of free banking came after the Office of Fair Trading criticised practices that earn them £8.3billion a year from the accounts.

The Government watchdog said customers were actually paying an average of £152 a year for banking services in the form of excessive overdraft and penalty charges.

It has warned banks to change how they charge for services.

But they have hit back by threatening monthly charges for basic services if they have to cut fees.

It is feared they will retaliate by introducing fees of between £5 and £20 for a current account.

Industry leaders hint that customers may also face extra charges to use a cash machine, write a cheque or pay a direct debit.

Angela Knight, chief executive of the British Bankers Association, said: 'It is important that this model, which is what customers have asked for - free for their normal banking, does remain.

'We are worried that the OFT seems to be challenging that.

'Do you really want to pay for ATM use, pay for statements, pay for direct debits in this country?'

The OFT yesterday launched what consumer groups called a 'devastating critique' of how banks charge for current accounts.

The biggest earner relates to the fact that banks pay very low or no interest on current account balances. But they invest the money in customers' accounts at much higher rates of interest to make a profit of £4.1billion a year.

The OFT wants banks to give each customer an annual statement showing the value of this lost interest. Separately, they make £2.6billion a year from excessive overdraft charges, which have risen by 17 per cent above inflation in four years.

Four million people are paying more than £200 a year in overdraft charges, with 1.4 million of them handing over more than £500.

The watchdog made it clear that profit margins on overdraft penalty fees, which can be £38 for bouncing a payment, are excessive.

It said the nation was overdrawn by an average of £680million a day in 2006. However, bank fees and interest on this sum amounted to £1.5billion, a return of 220 per cent.

The OFT identified dirty tricks where banks have secretly pushed up penalty charges to subsidise other products brought in to attract new customers.

It said finance industry claims that they look after customers by providing 'free banking' were bogus.

OFT chief executive John Fingleton described the lack of interest on current accounts as a 'stealth charge', adding: 'There is a systemic problem. All of the banks have moved towards charging us more and more for things we can't see. Banking is not free, it is costing us £150 a year. Because we can't see how much it costs, we can't compare and switch properly.'

The OFT complained vulnerable groups such as pensioners were suffering. It said: 'There is significant potential for slight errors in financial management to result in hundreds of pounds of charges.'

It also pointed out that a customer going overdrawn with one bank might not be charged, while another would have to pay £260.

The OFT says customers should be able to get interest on their current accounts without paying monthly charges.

Philip Cullum, of the National Consumer Council, said: 'The OFT has delivered a devastating critique of this market, which has too long failed consumers.'

Andrew Hagger, of the website MoneyNet, said: 'If and when the decision is made to cap unauthorised overdraft fees, it is inevitable that we will move towards paying monthly fees for personal banking.'

When First Direct imposed a current account charge of £10 a month for 200,000 of its customers last year, 20,000 closed their accounts.