Current accounts are costly and confusing, says competition Watchdog as it launches enquiry into the big banks

Complicated overdraft charges make it almost impossible for bank customers to choose the cheapest or most appropriate account for them.

As a result banks may not be bothering to compete with each other, leading to higher overdraft charges for all.

That’s the damning conclusion of the Competition and Markets Authority which announced today a full-scale enquiry into Britain’s biggest banks.

It said it will launch a full-scale 18-month inquiry which could lead to major banking reforms. These include a possible ban on complex fees and a cap on overdraft charges.

The big banks could also be forced to allow smaller rivals to use their branch networks and payment systems.

The CMA’s report pointed out that the largest four providers – Barclays, HSBC, Lloyds Banking Group and the Royal Bank of Scotland Group - account for more than 77 per cent of the current market in the UK.

But despite high charges and confusing fees, annual switching levels remain low with only a tiny 3 per cent of personal customers change bank each year.

The Authority also slammed the big banks for failing to provide decent services to small businesses.

“Our studies have found that significant competition concerns remain which mean that customers may not be getting consistently good service and value from their banks,” said CMA chief executive Alex Chisholm.

The news was welcomed by consumer groups. Richard Lloyd, executive director of Which?, said: “For too long customers have been getting a raw deal from the biggest high street banks, so a full inquiry into the current account market is welcome, if long overdue.”

Research by the group discovered that someone who goes into the red with the wrong account could end up paying £183 in fees and charges a month more than they may have been charged with the right account.

Citizens Advice chief executive Gillian Guy said: “Customers need better current accounts and an investigation into competition is an opportunity to address this.”

The bank current account market needs a “seismic change” to kickstart competition, reckons banking analyst David Black at Consumer Intelligence. “One of the issues that challenges consumers is the difficulty in comparing overdraft costs because of the vast array of different overdraft tariffs and structures in evidence.”

Mr Lloyd said the banks should heed the CMA’s warning. “The banks should not waste any time in making changes to put the interests of their customers first.”

Going into the red without permission and having payments rejected could cost an extra £183 in fees and charges a month with the most expensive current account. Which? researchers discovered the shocking variation between the most expensive and cheapest deals late last year.

Even those dipping into an authorised overdraft for just a few days a month with the wrong account from one of the major high street names – such as Lloyds Bank - could leave you around £120 worse off a year than if you’d switched to a more appropriate account.