Unity Trust relaxes penalty fees

The test case will have profound implications for personal accounts

The Unity Trust bank has become the first to do away with charges and interest on temporary overdrafts.

The bank operates by phone and the internet, and serves trade unions, charities and voluntary bodies, but not individual customers.

It says it will no longer impose interest and fees, but might still close accounts of persistent offenders.

Mainstream banks are currently defending their overdraft charges in a long-running High Court test case.

"At this time of severe contraction in the banking industry, we wanted to reiterate to our customers that we are in a very sound financial position," said Kevin Turmore, managing director

"We... promise that we will not levy penalty charges or high levels of interest for temporary overdrafts which don't have prior agreement, providing they keep in touch with us and let us know if they think they might exceed the financial limits of their account."

Current accounts

The bank was set up in 1984 and is owned by a variety of trade unions and the Co-operative Bank.

At the moment, if a customer goes into the red without permission, it charges interest at 15% per annum, and imposes discretionary charges, similar to those levied by High Street banks on personal customers.

That will change from the start of 2009.

So far this year, both Barclays and HBOS have made their overdraft charges easier to understand, in response to the continuing investigations by the Office of Fair Trading (OFT) into the way banks run personal current accounts.

No High Street bank has yet decided to do away with fees for going into the red.

However, it is widely expected that if the banks lose their test case, they will be forced to bring back a system of charging regular account or transaction fees instead, regardless of whether customers are in the red or not.