According to the Office of Fair Trading, the market in personal current accounts is not working well for consumers.

The OFT report on the issue found that much of banks’ revenue from current accounts is derived opaquely, with 81 per cent of income coming from two sources: insufficient funds charges (£2.6bn) and net credit interest income (£4.1bn). A significant number of customers do not know how much they actually pay in bank charges, either before or after they are incurred. Over three-quarters do not know the credit interest rate of their current account, and even those that do lack the means to calculate the interest they forgo.

The complexity and lack of transparency of personal current accounts makes it extremely difficult for individual customers to compare their bank account with other offers. There is thus little incentive for consumers to switch – especially as people generally believe that it is complex and risky to switch accounts. Also, when the switching process does go wrong consumers can find themselves bearing a significant proportion of the resulting costs. The result is that only six per cent of customers surveyed had switched in the last 12 months – one of the lowest switching rates in Europe.

A further result is that a minority of customers end up paying much more for their current account than others – for example, in 2006 1.4m people paid over £500 per year in charges. This can often mean potentially “vulnerable”, low income and low saving customers paying more as a result of incurring insufficient funds charges. The effect is not made any easier by a lack of simple mechanisms for consumers to control or opt out of an unarranged overdraft.

Overall, the report finds that the personal current account market may be stuck in an equilibrium that does not work well for consumers. Limited understanding of key account elements, combined with low confidence in switching, means that banks have less incentive to provide better offers on charges and interest. But without better offers from banks, consumers have little incentive to switch.

The OFT will spend the coming months engaging with banks and consumer groups to try to achieve greater clarity, transparency and consumer empowerment in this market, either through voluntary change or, if necessary, through other routes, potentially including greater regulatory intervention or a reference of the market to the Competition Commission.

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