The Office of Fair Trading will look at bank charges for customers who overdraw their accounts after winding up a months long probe into penalties for the late payment of credit card bills.

The OFT told credit card companies in April to slash penalties for the late payment of bills and said the principle of that decision applied to other charges such as those for unauthorised overdrafts, store cards and mortgages.

At the time, Credit Suisse estimated UK banks generate about 2 billion pounds of revenue from penalty charges across bank accounts and credit cards, though analysts expect lost revenues to be largely recouped elsewhere.

Since April, the majority of banks and issuers have cut their credit card penalty fees, and the OFT said on Thursday it thought no further intervention was warranted.

But it said the broad principles applied to the retail banking area, and said it would undertake further work on the application of these principles to bank current accounts.

The reduction of default charges on credit cards is great news for consumers, said John Fingleton, Chief Executive of the OFT. We are now extending that work to inform ourselves about account default charges.

The fact finding exercise is expected to take between three and six months, and the OFT will then decide whether or not to proceed with a detailed investigation.

The OFT cannot impose a cap on fees, but after its investigation into credit cards it said default charges should be adjusted and said it would take legal action if necessary.

FAIR AND LEGAL

The British Bankers' Association has said it does not accept that the principles applied to credit cards could be applied to overdrafts, but said on Thursday it would work with the OFT.

Our members remain of the view that the current account charging system is fair and legal, BBA Chief Executive Ian Mullen said. The majority of customers do not pay fees and enjoy free if in credit banking, unlike the vast majority of developed economies.

Some bank sources have already hinted lower charges could signal the end of decades of free current account banking.

Penalty charges on current accounts can include a variety of fees, such as for exceeding an agreed overdraft, bouncing a cheque or paying an item that takes an account into the red.

Royal Bank of Scotland, Britain's largest bank, said it charged 38 pounds for every cheque that bounced or direct debit payment it refused, with a maximum of three in a month. Customers are charged 28 pounds if they exceed their agreed overdraft limit.

HSBC said a fee of up to 30 pounds per item is charged when customers pay an item that overdraws their account. It charges 25 pounds if customers exceed their agreed overdraft, though some customers are covered by waivers.

Consumer group Which? welcomed the OFT's efforts to clarify charges and pressed for a swift solution for penalties it said could cost customers a total of up to 2.3 billion pounds in six months.

Analysts, however, said trimming these fees would probably have little effect on banks' profitability.

There are so many things that the banks can do to get this money back, analyst Simon Maughan at Blue Oak Capital said.

The regulator is squeezing a balloon as soon as they squeeze in one place, the excess profit will bulge up somewhere else.