Free current accounts came under renewed threat yesterday after the Office of Fair Trading announced the largest investigation into personal banking.

The OFT said that it intended to conduct a wideranging study of overdraft charges and the transparency and value of the service customers receive.

A combination of consumer pressure and increasing awareness of the complexity and cost of banking charges prompted the inquiry, which is due to report at the end of the year.

Consumer groups and MPs welcomed the investigation and urged the OFT to recommend that banks be prevented from penalising customers who go into the red with high fees. But the groups said that banks might try to levy monthly or annual charges on current account customers to recoup any lost revenue.

Emma Bandey, personal finance campaigner at Which?, said: “Banks could save a lot of time, money and effort if they just opened their books and showed us how they work out their charges. Prove to us you are being fair.

“We hope that this study is not surrounded by endless spin from the banks claiming a reduction in charges will spell the end of so-called free banking. Free banking is a myth. We are paying for our current accounts but just not in an upfront fee.”

HBOS, which comprises Halifax and Bank of Scotland, charges £39 for each bounced cheque or direct debit subject to a maximum of three fees per day. It also imposes a monthly £28 fee for exceeding an agreed overdraft limit. Abbey charges an unauthorised overdraft fee of £20 plus a £30 charge for each direct debit or cheque honoured when there is not enough money in the account.

It is estimated that the actual cost to the bank of a customer exceeding an agreed overdraft limit is less than £5.

The penalties are on top of punitive unauthorised overdraft interest rates that are often more than five times the bank base rate of 5.25 per cent.

The OFT said it shared public concern about the present level and incidence of charges, but believed that “any quick-fix solution might have unintended and far-reaching consequences across the sector and for consumers as a whole”.

The OFT study will include an examination of the implications of charging customers for having a current account. John Fingleton, its chief executive, said: “Our ultimate objective is a competitive retail banking market in which informed and active consumers drive strong competition and high levels of customer service among banks long-term, with minimum regulatory intervention.”

Watchdogs say that the complexity of the penalty system means that customers have little idea when they will be penalised and by how much.

Ian Gregory, 28, a management consultant, incurred more than £1,400 in charges when he was a hard-up student and graduate looking for work. He reclaimed the total sum from HSBC. “I always thought the charges were unfair but didn’t think there was anything I could do,” he said.

“When I saw people writing about claiming the charges back on website discussion boards, I thought I would do the same.”

HSBC initially refused to refund the charges, but it paid in full when Mr Gregory threatened to take it to court.

The OFT says that it has not ruled out referring banks to the Competition Commission. Last month the commission issued a draft ruling in Northern Ireland after an investigation into lack of competition among the big four banks there. Among its suggestions was that banks have a 14-day warning period before implementing charges.

A spokesman for HBOS said: “We are not going to try and preempt anything in the report. It would be wrong for us to comment on it at this point.”

Cashing in

— Which? calculated that customers pay £4.7 billion a year in default charges

— The average fee is £25.73

— Nearly two thirds of people have held the same current account for more than ten years

— Eight out of ten customers would leave their bank if it decided to introduce a monthly or annual fee for a standard current account

— More than two million customers have closed an account in the past six months

Source: Office of Fair Trading, uSwitch.com, YouGov, MoneyExpert.com, Which?