The British government is closing in on banks that have raised the cost of authorised overdrafts to offset lower charges for unauthorised borrowers. The move follows anger that prudent bank customers are being penalised for the actions of the irresponsible.

An investigation into the fairness of the £8 billion current account market by the UK Office of Fair Trading, published last week, focused only on unauthorised overdrafts. It found that providers had been voluntarily reducing rates since 2007. However, research by moneynet.co.uk, the comparison firm, found providers have been recouping the losses incurred by raising authorised rates from 13.1% to 15.3% over the same period. In some cases, rates have more than doubled.

Now the OFT says it will press ahead with an investigation into authorised rates as well. A spokesman told The Sunday Times that it would reassess the entire current account market in 2012 and this assessment would include "both authorised and unauthorised rates".

In the recent report, the OFT said legislation was not necessary to make charges fairer because fees for "bounced" payments have fallen from an average of £34 in 2007 to £17 today. Charges for items that push customers into an unauthorised overdraft have fallen from £30 to £22.

Some providers, though, such as HSBC and Nationwide, have kept charges the same over the assessed period, at £25 for unpaid (bounced) items over £25 with HSBC, and £30 with Nationwide.

Meanwhile, rates for authorised overdrafts with Nationwide have gone from 7.75% to 18.9%, and from 16.6% to 19.9% for customers of HSBC. From next month, Barclays will lift the authorised rates on its Graduate Additions account from 9.9% to 14.9% and Additions Active account from 14.9% to 18.3%.

Andrew Hagger at Moneynet said: "Unauthorised overdraft rates have dropped but this isn't the full story. In some cases, as with Halifax and Alliance & Leicester, a monthly interest rate has been replaced with a daily fee, making it far more expensive for some customers."

One of the best accounts for authorised overdrafts is offered by First Direct. It requires funding of least £1,500 a month, or you pay a £10 fee, but the overdraft rate is at 15.9%. You also get a £250 interest-free buffer.

Source: http://www.timesonline.co.uk/ on 21^st March 2010.