Lloyds and RBS to cut their overdraft charges

Nationalised banks to be made to lower fees as OFT drops court case

Millions of bank customers could soon be charged lower overdraft fees under a deal being thrashed out with the Office of Fair Trading, the Government disclosed yesterday.

Consumer Affairs Minister Kevin Brennan said the two part state-owned banks would be "co-operating fully" with moves to improve much criticised unauthorised borrowing fees for current accounts.

The OFT confirmed talks with the banking industry yesterday as it announced the end of its two-and-a-half-year legal battle to limit the fees, which total £2.6bn a year, following a defeat at the Supreme Court last month.

The watchdog, which pointed out that the Government had threatened to legislate unless the banks lowered their charges, said it hoped to report back on its progress in March.

Any future action under the 1974 Consumer Credit Act – rather than the 1999 Unfair Terms in Consumer Contracts Regulations, which it had previously used – was likely to fail, it explained.

But it expressed ongoing "significant concerns" about the personal current account market, and planned to discuss with the banks a range of options, from voluntary measures to legislative change.

Banks earn around a third of their £8bn revenues for current accounts from the unauthorised borrowing fees, when people exceed their overdraft limit – but the OFT complained that they were "difficult to understand, not transparent and not subject to effective consumer control".

"We remain deeply concerned that the market for personal current accounts is not working well for consumers and does not give banks sufficient incentives to compete," said John Fingleton, its chief executive.

The watchdog stressed that its decision "should not be treated as advice" to customers considering bringing an individual action against financial providers under the Consumer Credit Act, which would be decided on the particular facts in each case.

The British Bankers' Association welcomed the OFT's decision and said its members would enter talks: "The banks understand customers' concerns, and talk to their customers regularly and develop accounts in line with feedback," the BBA said, adding that the current account market was "dynamic and competitive."

Speaking to BBC's Radio 5 Live, Mr Brennan said that although RBS and Lloyds (which merged with HBOS) were run at "arms-length" from the Government, they would be required to thrash out a deal to lower charges. In The Independent yesterday, he signalled ministers were prepared to legislate to lower charges for current account holders, unless the banks acted.

Asked whether the Government would use its major shareholdings in Lloyds and RBS to force changes, mr Brennan told the BBC: "Well we're actually requiring those two groups you've mentioned, to co-operate fully in reaching a voluntary agreement with the OFT on matters such as this.

"...they are managed at arm's length, quite rightly, because they have to provide a return to the taxpayer. But let me make it clear, we want to make sure that we find a voluntary agreement that makes charges much more transparent and fair for consumers, and if that's not forthcoming – I believe it will be forthcoming – we've made it clear that we're prepared to take the action necessary to enforce that."