High Street banks are expected to be made to slash the charges they impose on customers who break their overdraft limits. Helen Gabriel reports on the punishing charges currently costing customers £4.6 billion a year.

MANY people will have sighed with relief as the Office of Fair Trading (OFT) launched an investigation into how much money the big banks make from overdrafts.

The charge for slipping into an unauthorised overdraft can be more than £25, and it has been estimated that the banks make £40 million a year from such penalties.

But Len Cruddas, chief executive of York and North Yorkshire Chamber of Commerce, has warned that it might not all be good news.

He said: "I can see what the OFT means, in that if you go overdrawn it can be an expensive process if it's unauthorised.

"But banks are going to make money somewhere - it's just a case of how they do it. If they don't make money from that, they are going to do it from something else.

"Unfortunately, you get a situation where often the people who need the money the most are the ones who are suffering.

"Those who are being charged are bound to think it's grossly unfair, but those who are better at managing their money probably think it's a fair system.

"Banks are going to say: It's our money and we didn't give you permission to borrow it'. After all, they have a responsibility to their shareholders to make capital.

"If you change bank charges, all you are going to do is change the packaging of how those charges are made. They aren't necessarily going to end up charging you any less."

In April, the OFT called on credit-card companies to reduce their default fees, which it said were unfair and cost customers millions of pounds each year.

The OFT said the fees should be capped at £12, unless there were exceptional reasons to charge more, and said most companies had now made the changes. However, it believes the principles "read across to the retail banking area", and it has now turned its sights on overdraft charges.

John Fingleton, the OFT's chief executive, said: "The reduction of default charges in credit cards is great news for consumers.

"By taking an innovative approach to this issue, the OFT has brought about a significant change in one area of the financial-services sector.

"We are now extending that work to inform ourselves about account default charges."

Its investigation is expected to take up to six months.

The British Bankers' Association (BBA) has agreed to work with the OFT, but said its members thought the system was already fair.

A spokesman said: "Our members remain of the view the current account charging system is fair and legal.

"The majority of customers do not pay fees and enjoy free in-credit banking, unlike the vast majority of developed economies."

The BBA spokesman added: "Banks do charge customers a fee when they go overdrawn without the prior agreement of the bank, but where there are genuine extenuating circumstances, many banks will consider waiving this fee in light of individual circumstances."

About 40 million adults have a current account, with 35 per cent relying on their overdraft to make ends meet, according to previous research.

But 42 per cent of current-account holders end up paying a high price for going over the authorised overdraft limit.

Consumer groups welcomed the investigation, saying banks should be forced to make charges proportionate. Emma Bandey, of Which?, said: "Which? has long asked banks to open their books to public scrutiny as we feel that default charges should be proportionate and they should reflect the administration costs involved.

She said: "They should not be, as they are now, arbitrary figures picked to make the most money out of unsuspecting customers."

HELEN GABRIEL tells how she has personally been hit by the penalties

I'M ashamed to admit that when it comes to going over my overdraft limit, I've been there and got the T-shirt.

On the seventh day of every month I sneak out of my house early, hoping to avoid the postman. It's the day my bank statement arrives and at 25 years old I still struggle to make ends meet each month.

I certainly don't own a house. In fact, I don't even own a car. All I have to show for my debts is an education.

But it strikes me that I was the hardest hit when I was least able to do anything about it.

It was during my four years at university, when I lived on tins of value baked beans and loaves of stale bread filched from my richer housemates' cupboards, that the bank charges did the most damage. The reality is that the £30 charges as a result of "insufficient funds" are rarely incurred by those who can afford to pay them. It merely meant that I had £30 less to live off the following month - which amounts to an awful lot of cans of beans.

Well, it actually meant an extra night shift stacking shelves in the local supermarket - not easy when you still have to be alert enough for a 9am lecture the following morning.

I understand that banks need to make their money somewhere, but the reality is that for some people, those charges can make a huge difference to their lives. An extra £30 goes a long way when you only had £20 to last you the week in the first place.