£100 charge for £5 overdraft

By SEAN POULTER, CONSUMER AFFAIRS EDITOR
Updated: 06:22 EST, 10 October 2005

GOING just £5 overdrawn can cost customers £100 in bank fees and crippling interest charges, a report will show today.

Overdraft charges and other penalties have soared by 15% to 16% in the past year, it will say.

The findings make a monopoly inquiry into the activities of high-street banks more likely, according to city analysts.

The Government might also propose a windfall tax on profits - which are expected to reach £30bn for the big banks this year.

The report - by the Centre for Economics and Business Research - found that soaring bank charges had pushed up the cost of living. The Government's inflation measure has risen from 2% to 2.4% this year.

'People have assumed that rising inflation has been caused by higher petrol prices, however we believe higher bank charges are also a factor,' said Angus McCrone, senior economist at the centre.

'The figures on charges suggest the banks, which are already very profitable, are seeing the opportunity to build those profits further. It is surprising that the banks are able to apply substantially higher charges at a time of generally low inflation.

It may be that there is a lack of competition in the industry. 'There may be a concentration of market power issue for the competition authorities to look at.'

Mr McCrone said that the Government, which is already looking for ways to raise taxes to balance its books, could target the banks with a windfall tax. 'The banks have not picked a very wise time to put their heads above the parapet with increases in charges,' he said. 'It makes them more vulnerable to a windfall tax.

'It would certainly be more popular with consumers than any rise in direct taxes.' Ten days ago HSBC increased its penalties for unauthorised spending from £20 to £25. NatWest increased its fees from £35 to £38 the same day.

In August, Lloyds-TSB raised its charge for bounced cheques to £35 and Halifax moved its fee up to £39. Most banks impose punishing interest rates on overdrafts of close to 30%.

Banks are putting the squeeze on customers in other ways. Some are introducing annual fees on credit cards, while others are increasing card interest rates. Banks are also accused of promoting rip-off payment protection insurance on personal loans.

'Someone going just a few pounds overdrawn can be hit with a huge bill,' said Dan Newbolt of finance industry journal Moneyfacts. 'There is a very big profit margin.'

The Independent Banking Advisory Service, a consumer group, has been calling for a windfall tax on banks for two years.

'We see the tax as being a powerful weapon to make the banks realise they cannot go on exploiting customers,' said the service's founder, Eddy Weatherill yesterday.

'They are guilty of massive rip-offs and profiteering. We see charges going up, unfair sales practices, poor value products. They have a stranglehold on the nation's finances. The profits are obscene. This is one industry that can clearly afford to pay a windfall tax.'

But the British Bankers Association said: 'Any such tax would be damaging. ' It would penalise one of the UK's most successful industries for being efficient and profitable. A strong economy needs strong and profitable banks.'

He said the industry would pay £10bn in Corporation Tax this year. The Tories imposed a windfall tax on the banks in 1980, while Labour did the same to the utilities when it came to power in 1997.