By Matthew Legg, business editor

Last updated 10:00, Monday, 28 July 2008

The current account market is not working well for consumers, a study from the Office of Fair Trading (OFT) has concluded.

Frustrated? You may well be. The Office of Fair Trading says the banks’ current account market is not serving customers well. It calls for greater transparency and more competitive rates

A “significant number” of customers do not know how much they pay in bank charges, either before or after they are incurred, the OFT said.

It added that the complexity and lack of transparency of current accounts made it “extremely difficult” for people to compare their account with others.

The report found that current accounts generated revenues of £8.3 billion for the banks during 2006 – more than the revenues from savings and credit cards combined.

But it said the bulk of this money was derived “opaquely” and 81 per cent came from just two sources, with charges for having insufficient funds generating £2.6 billion, while net credit interest income brought in £4.1 billion.

It added that there also appeared to be “substantial cross subsidisation” between consumers who incurred charges and those who did not, with “vulnerable, low income” consumers often subsidising those on higher incomes.

OFT chief executive John Fingleton said: “This market is not serving customers well. Customers lack the information they need to choose the best deal, and this in turn weakens the banks’ incentives to compete.”

But the British Bankers’ Association said the OFT report did not take into account the cost of providing the services.

It said: “The OFT’s market study contains many good points but some of its numbers are difficult to rationalise as they use assumptions and averages and, importantly, do not recognise the costs of providing the services.

“UK banks offer a wide range of products and services and are committed to providing their customers with high quality service and accounts to meet all their financial needs. The retail banking market is open and competitive.”

Catherine McGrath, director of current accounts at Lloyds TSB, added that competition in the market was “fierce”.

She said: “There are over 100 different accounts available from 29 different providers with many paying extremely competitive rates of interest.”

The OFT said 12.6 million current accounts, nearly one in four, incurred at least one charge for having insufficient funds in 2006, with 1.4 million people paying more than £500 per year in charges.

It added that more than a fifth of consumers were unaware of insufficient funds charges until they had incurred one.

Even when consumers stayed in the black, 88 per cent received interest of less than 0.5 per cent a year in 2006.

The report also found that there was little incentive for consumers to switch provider, particularly as, when the switching process went wrong, consumers had to bear a significant proportion of the costs.

Research carried out by the OFT found that 28 per cent of people who switched accounts had experienced problems.

It added that only six per cent of people surveyed had changed current account provider during the past 12 months, one of the lowest switching rates in Europe.

The OFT said it would spend the coming months working with banks and consumer groups to try to achieve greater clarity and transparency in the market, either through voluntary change or, if necessary, greater regulatory intervention or a referral to the Competition Commission.

The study comes in the wake of the OFT’s recent High Court victory on the issue of unauthorised bank overdraft charges, which paves the way for a second hearing to decide whether the charges are unfair and what a fair charge should be.

Unauthorised overdraft fees can be as much as £35 for a single bounced payment, although campaigners claim the cost to the banks could be as little as £2.50.

Banks have appealed against the verdict, and the second hearing will be delayed until this is settled.

Phil Jones, personal finance campaigner at consumer group Which?, welcomed today’s report.

He said: “This confirms what we’ve always argued – that there’s no such thing as free banking.

“What’s needed is greater transparency, competitive rates and for switching account providers to be made easier.”