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High Street banks warned on Wednesday night that they may have to abandon free banking for customers after an Office of Fair Trading inquiry cast doubt over charges for overdrafts.

The warning came after the long-awaited OFT inquiry in credit card penalty charges for late or missed payments, which concluded fees charged for late payment were unfair and too high.

While the banking industry had expected this outcome it was taken by surprise when the OFT went on to say that the same principles could be applied to overdraft and mortgage charges, and gave the banks an eight-week deadline to address the criticism. The move leaves the high street banks facing a ?1bn a year hit to profits, according to Credit Suisse, which issued an analysts note stating that those hit hardest would be banks with big consumer lending operations, such as Barclays, HBOS and Lloyds?TSB.

The OFT inquiry ordered the banks to slash penalty fees on credit cards, saying they had levied unlawful charges in excess of ?300m each year. It said current default fees on credit cards ? about ?25 ? were too high and said anything over ?12 could be considered unfair and challenged in the courts. Typically overdraft charges are about ?30-?28.

Wednesday?s ruling has already led some analysts and bankers to question whether this could lead to the end of free current account banking in the UK.

The British Bankers Association, the industry body, said last night it was ?very disappointed and surprised? by the ruling and suggested it could prompt some banks to review arrangements on current accounts, which are currently free to operate.

Joanna Elson, executive director of the BBA, said: ?If the OFT pushed this to its logical conclusion it would cast questions over the arrangements at present.?

Unlike other countries where customers pay a fee for operating a current account, in the UK banks provide free banking for customers who stay in credit.

It could lead to banks trying to claw back lost revenue by charging customers an annual fee to hold a credit card or raising Annual Percentage Rates on cards.

The OFT, which cannot impose a cap on fees, has given the banks until May 31 to respond but has made it clear that it would be prepared to take legal action after that if there is no sign of progress.

John Fingleton, the OFT chief executive, said yesterday: ?We will litigate if we have to.?

The OFT feels credit card penalty fees should reflect the costs of recouping overdue payments.

On Wednesday it emerged that out of the eight credit card issuers in dialogue with the OFT most have disagreed with the regulator?s findings.

The banks said it was too early to say what they would do or whether they would mount a legal challenge. Lloyds?TSB said it was ?surprised and disappointed? with the ruling.

Consumer groups were delighted, delighted.

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