Watchdog probes cost of banking

Bank customers may end up paying annual fees

The Office of Fair Trading (OFT) has launched a wide-ranging study into the charges banks impose on customers.

It could lead to recommendations that banks charge their customers annual fees - an end to "free banking."

The OFT says people currently have no idea how much they are really paying for their banking services.

This wider study will run alongside its continuing investigation into the banks' charges for unauthorised overdrafts and bounced cheques.

"We want greater transparency in what you get and what the charges are," said an OFT spokeswoman.

"This will be the most wide-ranging study into personal banking to date."

Free banking?

It is widely assumed that most UK bank customers get their current accounts for nothing, because most are not charged annual or monthly fees.

We don't believe banking is free - people clearly pay for it but customers don't see how they pay for it John Fingleton, OFT Q&A: The probe and you

However, bank services for ordinary customers contain hidden cross subsidies and charges, which the OFT increasingly regards as unfair.

Poor rates of interest on money held in current accounts are one example.

Another is the large income banks derive from charging high fees to customers who go overdrawn without permission.

This helps them subsidise the cost of running a current account for customers who stay in credit.

"We don't believe banking is free - people clearly pay for it but customers don't see how they pay for it," said the OFT's chief executive John Fingleton.

Waterbed effect

The OFT last month started a formal investigation into the level of charges that banks impose when customers go overdrawn without authority.

That followed a similar six-month informal investigation, brought about by concerns that overdraft charges and the fees banks charge for cheques which bounce were unjustifiably high.

Without greater clarity, genuine competition will never flourish Robert Peston, BBC business editor Read Robert's view in full

The decision to look at the matter further led to widespread accusations that the OFT was letting the banks off the hook, having forced credit card operators to cut their default fees to £12 in 2006.

However, the OFT says it is concerned that if banks are forced to reduce their charges in one area then they will simply raise them in others.

To avoid any consequences of this so-called "waterbed" effect, it has now decided that the whole structure of personal banking in the UK should be scrutinised before it makes any recommendations.

The OFT aims to publish the preliminary conclusions of its latest wider study by the end of the year.

But it is clear that the two investigations are going to be closely linked.