The Office of Fair Trading (OFT) today threatened to report banks to the Competition Commission after finding that the current account market did not offer good value for customers.

Following an investigation by the competition watchdog into the £8.3 billion current account industry, John Fingleton, chief executive of the OFT, said that retail accounts were a "vital gateway to effective participation in the economy. "But this market is not serving customers well," he said. "There is much the banks could do to improve how the market works."

Banks make an estimated £152 per year per active account.

The OFT will spend the coming months working with banks and consumer groups to improve the industry but, if necessary, would consider imposing heavier regulation of current accounts or making a referral to the Competition Commission. Consultation documents on the issue will be available at www.oft.gov.uk later today.

The OFT found that a significant number of bank customers did not know how much they paid in bank charges, even after they have incurred the charges. The investigation found that about four million people incurred charges of more than £200 in 2006, of which 1.4 million people paid more than £500. These charges were hitting "vulnerable" low income earners, particularly because the banks offered no simple mechanisms for consumers to control or opt out of an unathorised overdraft, the OFT said.

The investigation used 2006 figures because they were the most complete set available, an OFT spokewoman said.

More than 75 per cent of people do not know the credit interest rate offered on their account. Meanwhile, complexity of accounts made it extremely difficult to compare them, the OFT said. Just six per cent of customers surveyed by the watchdog switched their account in the past 12 months, making Britain's one of the lowest switching rates in Europe.

Banks are opaque about how they derive revenue from current accounts, with 81 per cent of their income coming from bank charges, worth about £2.6 billion a year. The banks make a further £4.1 billion from interest on overdrafts. Current accounts generate more revenue for banks than savings and credit cards combined, the OFT said.

The damning findings come in the wake of the OFT's recent High Court win over the bank on the legality of unauthorised overdraft charges. Banks have appealed against the verdict and a second hearing on whether the charges are unfair and what a fair charge would be has been delayed until the appeal is heard. Fund charges rose by 17 per cent between 2003 and 2007, according to the OFT's findings, with 12.6 million accounts, accounting for about 23 per cent of active accounts in the UK, incurruing at least one unathorised overdraft charge in 2006.

Banks immediately rejected the accusations. Catherine McGrath, director of current accounts at Lloyds TSB, described competition in the current account market as "fierce". "There are over 100 difference accounts available from 29 providers, with many paying extremely competitive rates of interest," she said. "Over one million people joined Lloyds TSB last year and research that we conducted showed that, of people who's switched their accounts, 79 per cent found it to be easy."

Angela Knight, chief executive of the British Bankers' Association, dismissed the OFT's £152 revenue figure as "contrived" and said that if the OFT continued to push for unathorised charges to be lowered, banks would be forced to recoup their costs by increasing fees for other services.

Speaking on BBC Radio 4, Ms Knight said: “You can incur charges if you do things without making arrangements first but do you really want to pay for ATM use, pay for statements, pay for direct debits in this country? Surely people don’t ... “The Office of Fair Trading unfortunately does need to perhaps look at that balance as far as its report is concerned."

Money Central: Have you been unfairly charged?

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