'Delinquent' bank customers given chance to slash overdraft charges

As account fees are probed, one bank is manoeuvring to pacify the watchdog

High-street bank Alliance & Leicester (A&L) is set to launch a "low-interest, low-charges" current account ahead of an expected regulatory crackdown on mainstream bank accounts that impose high penalty charges.

It plans to offer customers a new low-cost "choice" and, in doing so, appease the Office of Fair Trading (OFT), which is due to report on bank charges in the spring.

The watchdog is widely expected to come down hard on charges of up to £39 levied by all banks as penalties for unauthorised overdrafts on standard current accounts.

These can regularly involve "fines" of hundreds of pounds as charges accumulate and incur interest the longer customers fail to replenish their accounts. Sometimes, the penalties are activated after customers have breached their official overdraft limit by just a few pence.

A&L's new account is still under wraps and will not be advertised to new customers. Instead, it will be offered as an option to habitual "delinquents" - those who fail to keep to the terms of their current account agreement and run up excessive fees, or possibly to those who complain about high fees.

The reason for not offering the deal to new customers, according to an insider, is that the bank believes there would be no demand."No one thinks they are going to incur lots of fees [when they take out an account]," he says.

A&L refused to comment on the plan and simply said it was one of several options being considered. It also declined to comment on whether the new deal was directly related to the OFT investigation.

This latest twist in the UK current account market highlights the drastic measures being taken by banks to try to avoid a bruising clash with the watchdog. The OFT inquiry into bank current account charges follows a similar report last April on the credit card default charges imposed by providers for late and missed payments.

On that occasion, the watchdog ruled that any charge exceeding £12 would need to be justified in terms of "exceptional business factors" in order to be considered fair, and therefore lawful, under the Unfair Terms in Consumer Contracts Regulations 1999. In the event, nearly all card providers in effect halved their card default payments.

Insiders say A&L is hoping the new current account will allow it to demonstrate to the OFT that customers have a choice - high interest and high penalties, or low interest and low, or no, penalties - so that maintaining high fees as an option is "fair" in this context.

The row between consumers and banks over current account default charges has been growing over the past 12 months. Customers emboldened by the OFT ruling on credit card default fees have begun challenging banks with the threat of court action on current account penalties.

Campaigning websites like bankchargeshell.co.uk, which encourage customers to take on their banks, have now been backed by consumer body Which?. Their online sites include templates available for download to help mount challenges, and tips on how to represent yourself in court.

So far, no bank has defended its current account charges in court, preferring to settle outside for sums often in excess of £1,000.

A&L has attracted controversy by taking a particularly robust attitude to those prepared to go all the way with their legal claims, actually closing the accounts of these customers (Nationwide building society has also done so).

"There have been a small number of instances when a customer has taken legal action to recover their fees," says an A&L spokesman. "As a gesture of goodwill we have repaid these. But because it highlights they were unhappy with the account, we have opted to close it. Opting to settle the claim in this way is not an admission of liability on our part."

Meanwhile, rival high- street banks are preparing for a crackdown on fees by finding other areas where they can increase charges in order to protect profits.

Lloyds TSB, NatWest and HSBC have all increased their fees for authorised overdrafts in recent weeks.

NatWest has done so for the second time in three months, raising the interest on some of its basic current accounts from 18.86 per cent to 19.99 per cent for overdrafts under £1,000.

At the start of December, Lloyds TSB put up its overdraft rates to 18.3 per cent.

The current account sector is undergoing a period of upheaval. First Direct's decision last November to levy a £10 charge on customers who do not pay at least £1,500 into their account each month was predicted by doomsayers as spelling the end of free banking.

Stuart Glendinning, managing director at the price- comparison website money- supermarket.com, says: "It's true that the OFT is likely to force banks to reduce overdraft charges, and this may have an impact on overall profitability.

"Ultimately this will result in the banks implementing new fees, like the current account ones applied by First Direct, or becoming much stricter with their lending criteria - to ensure that those always relying on their overdraft are less able to do so."

The current account market is fiercely competitive and A&L has been in the forefront of paying high interest. Its internet-based Premier Direct tops many "best buy" tables for people in credit, paying 6.1 per cent to new customers on balances up to £2,500. Barclays, HSBC, NatWest and Lloyds TSB offer just 0.1 per cent on many of their high-street accounts.