The Office of Fair Trading (OFT) raised the pressure on the banking industry in its dispute over current account charges yesterday by threatening to drag high street lenders into another multibillion-pound court case if they do not agree to radical changes.

John Fingleton, chief executive of the OFT, said that retail accounts were not serving customers well. He hoped banks would heed his pleas to make banking cheaper and simpler, but added: “We won't shy away from litigation if we need to use it”.

The banking industry is midway through a legal battle with the OFT over what constitutes fair overdraft charges. A loss could cost the banks £10 billion in compensation. Further litigation would introduce uncertainty over banks' profits at a time when the sector is struggling with falling mortgage sales and competition for savings.

Mr Fingleton added that he would consider referring the banks to the Competition Commission, which could compel changes on the industry.

Yesterday the OFT released the findings of a year-long inquiry into current accounts, which has run concurrently with its court case on overdraft charges. It found that a big minority of bank customers did not know how much they paid in bank charges. It found that 1.4 million people paid more than £500 in charges in 2006. That year's figures were used because they were the most complete set available.

These charges were hitting what it called vulnerable low-income earners, because the banks offered no simple way for consumers to control or opt out of an unauthorised overdraft, the OFT said. This meant that poor people subsidised banking for rich people who were less likely to incur charges.

Mr Fingleton derided the banks' claims that Britain had free banking. “We are saying clearly that banks earn £152 per active bank account. It is not free and even people who get closest to free banking have to walk a careful tightrope to avoid charges,” he said.

More than 75 per cent of people do not know the credit interest rate on their account and the complexity of accounts made it difficult to compare them, the OFT said. Only 6 per cent of customers surveyed by the watchdog switched their account in the past 12 months, making Britain's one of the lowest switching rates in Europe.

The damning findings come in the wake of the OFT's recent High Court win over the banks on the legality of unauthorised overdraft charges. Banks have appealed against the verdict and a second hearing on whether the charges are unfair and what is a fair charge has been delayed until the appeal is heard in the autumn.

The Financial Services Consumer Panel said that the OFT's findings were a “damning indictment”.

Banks rejected the accusations. Angela Knight, chief executive of the British Bankers' Association, said that the OFT's £152 revenue figure was contrived, adding that if the OFT continued to push for unauthorised charges to be cut, banks would be forced to recoup their costs by raising other fees.

Ms Knight said: “They have made assumptions that do not work on the basis of what individuals do with their accounts. There does not seem to be fair balance in the report. Where is the evidence about the cost of running 11,000 branches, half a million staff, call centres and other services?”

Catherine McGrath, director of current accounts at Lloyds TSB, described competition in that market as “fierce”.

How the charges rack up

£8.3bn Revenue made by banks on current accounts

£2.6bn Revenue from overdraft charges

£4.1bn Revenue from interest on overdrafts

£152 Revenue on each active account

0.5% Interest paid on 88 per cent of current accounts

£680 Average daily unauthorised overdraft balance

12.6m Number of people who incurred at least one unauthorised overdraft charge

6.6m Number who paid up to £100 in charges

1.4m Number who paid up to £500 in charges

Source: Office of Fair Trading, All figures for 2006