Banks and building societies could face investigation over the high fees they charge customers who inadvertently go overdrawn, an industry body says. The Banking Code Standards Board (BCSB), which works to ensure customers get a fair deal, says it is concerned people in financial difficulties are not being treated sympathetically by banks. Banks and building societies currently charge up to £25 to customers who exceed their credit limit, go overdrawn without authorisation, or bounce a cheque.

CUSTOMERS at Britain's high street banks are paying the most exorbitant charges in Europe.

Those who accidentally go overdrawn face "punitive" charges often 10 times greater than those on the Continent, an investigation has revealed.

Even an authorised overdraft often costs twice as much as elsewhere in Europe. A customer with a Lloyds TSB Classic account from the TSB range, who went overdrawn without permission by just £15 for 10 days, would face charges of more than £50. A customer at Deutsche Bank in Germany, Crédit Suisse in Switzerland or IMI-San Paolo in Italy would be charged less than 50p.

Banks such as Lloyds TSB and National Westminster not only charge higher interest rates for going into the red without permission, but also levy extra charges of up to £5 a day. Even customers who always stay in credit are often forced to pay for services - such as a banker's draft and stopping a cheque - which are frequently free in other countries. "It's outrageous that any bank can charge £5 a day for an overdraft," said Eddie Wetherill, of the Independent Banking Advisory Service. "These charges are the worst in Europe and they should be outlawed because they drive people deeper into debt. "The high street banks make billions in profits, but seem to be inventing new fees all the time.

For most, free banking is fast becoming a myth." Last year the four main high street banks reported pre-tax profits of £8.87 billion - up £1.75 billion in a year. In August, despite widespread job shedding and branch closures, the four reported combined half-year profits of nearly £5 billion. They are proving particularly profitable in retail banking, where they rely on the accounts of ordinary British consumers.

The average return on equity in 1998 was 21% for British banks, unheard of in the rest of Europe. Warburg Dillon Read, the merchant bank, estimates that the average post-tax return on equity for French banks in the same year was 10% and 9% for German banks.

Comparing the charges of Barclays, National Westminster, HSBC and Lloyds TSB with those of their foreign counterparts have led to new calls for a windfall tax on high street banks. Gordon Brown, the chancellor, has already ordered an inquiry into the banking industry and warned last week that he intended to force them to publish league tables comparing key charges for financial services.

The survey reveals that British customers pay huge charges for going overdrawn compared with those on the Continent. The base rate in the 11 countries using the euro is 2.5%, against the Bank of England's 5.25%, but this is not enough to explain the huge difference in borrowing charges. A current account customer at National Westminster pays an effective annual interest of 33.8% for an unauthorised overdraft plus a £3.50 daily charge. IMI-San Paolo, Italy's biggest bank, charges only 12.5% annual interest plus a fixed fee of 0.75% of the maximum amount borrowed.

A customer with an authorised overdraft at National Westminster pays annual interest of 17.8%, far higher than his Italian counterpart at IMI-San Paolo, who pays 7.5%. Both banks offer free banking to customers in credit.

In France, where customers also enjoy free banking when in credit, an authorised overdraft at the BNP bank would have an effective annual interest rate of 11.85% and no other charges. Barclays customers, however, would pay 18.8% in addition to a £5 monthly fee. British bank customers most likely to fare better than some of their European counterparts are those who always stay in the black because some foreign banks, such as those in Germany and Switzerland, often charge monthly fees. However, British banks commonly charge for bankers' drafts and stopping cheques, services that are often free in the rest of Europe.

Many customers say they are being unfairly punished by the British banks for accidentally going overdrawn. Sam Millward, an 18-year-old student at Guildhall University, London, closed his Lloyds TSB account after a £10 charge for accidentally going beyond his borrowing limit by just £2 because a cheque did not clear in his account. "I had never been overdrawn before but they didn't want to know," he said last week. "I left the bank because it annoyed me so much."

Peter Hirsch, of Retail Banking Research, said customer inertia was partly responsible for the high interest rates. "The fundamental change will come when consumers move their bank accounts," he said. "They tend not to, partly because they think it is more bother than it is, and partly because they think the banks are all as good or as bad as one another."

Brian Capon, of the British Bankers' Association, said: "British customers have the advantage of flexibility because it is generally much easier to arrange an overdraft here than in the rest of Europe. If people do think they are being charged over the top, then they should shop around because it is a very competitive market."

A Lloyds TSB spokesman said: "Some of the charges can be seen as punitive, but what is the other side of that? I don't think it would be responsible to let anyone have any overdraft they wanted." Barclays and HSBC both said they offered value for money and it was difficult to make direct comparisons between countries because the banking environments differed from one to the other. A National Westminster spokesman said: "The charges on unauthorised overdrafts reflect the fact that we are trying to discourage them."

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