WATCHDOG DROPS BANK CHARGES ACTION

The regulator's decision, which follows a Supreme Court ruling that the issue does not come under its remit, will come as a blow to consumers hoping to claim back the charges.

But the OFT said it still believes "fundamental changes" are needed to ensure the market works in customers' best interests.

It will now discuss a range of options, from voluntary measures to legislative change, with banks and consumer groups.

The OFT said any investigation into the fairness of bank overdraft charges would have "very limited scope and low prospects of success" in light of last month's Supreme Court ruling that the charges do not come within its regulation under unfair contract rules.

In a statement the watchdog said: "The OFT nevertheless continues to have significant concerns about the operation of the market for personal current accounts.

"Despite some recent and planned improvements by banks, particularly around transparency and customer switching, it believes fundamental changes are still required for the market to work in the best interests of bank customers."

The OFT said banks earn around a third of personal current account revenues from unarranged overdraft charges "that are difficult to understand, not transparent and not subject to effective consumer control".

Customers who go into unauthorised overdraft or breach their agreed limit can be charged as much as £35 or more for a single bounced payment, although campaigners claim the actual cost to the banks could be as little as £2.50.

Banks generate around £2.6 billion of revenue a year from the charges, which is used to subsidise free banking for other consumers.