The government has referred Britain's banks to the Competition Commission after an official report accused the industry of making excess profits from its customers. The competition watchdog was asked to look at the provision of financial services to small and medium-sized businesses.

According to the government report, banks operate a 'complex monopoly' and their customers are paying between £3bn and £5bn more than they should for their banking services - that's up to £400 a year for each person!

Charges for cash machines are too high and low income consumers hit hardest. There is even less competition in the small business market, where just a few banks dominate.

The criticism comes from the head of a government inquiry into banking, Don Cruickshank, after an investigation lasting 16 months. His recommendations are likely to be addressed by Chancellor Gordon Brown during his Budget speech on Tuesday. The referral was the government's first action on the report's recommendations. Criticism of high street banks by Mr Cruickshank is particularly critical of the four big high street banks, Barclays, NatWest, HSBC and Lloyds TSB.

Don Cruickshank accuses banks of not competing. They dominate the market for current accounts, controlling 80% of personal accounts. People are more likely to get divorced than change their bank account. They made profits last year of more than £12bn, (£20 billion estimated for year end 2000 Ed.) which Mr Cruickshank condemns as "unduly high". The report points out that because few people switch banks, even when better deals are available elsewhere, the banks are free to make high charges and pay little interest. He is recommending changes to ensure that the big four do not prevent new competitors offering better deals.

The banks argue that the industry is intensely competitive, especially compared with the rest of Europe. They say that making it too easy for other companies to start new banks would pose a threat to customers, who could not be sure their money was safely looked after.

Have banks ever been more unpopular? The perception of fat cat banks laughing at their customers has never been stronger. News in recent weeks of a possible £2.50 charge on cash withdrawals from banks provoked headlines condemning them for their greed.

Barclays sparked the row on cash machine charges, but they could be about to get their come-uppance following the publication of the government's report on competition in banking.

The 16-month review has been led by Don Cruickshank, who believes it should be easier for new competitors to enter the market, especially in business lending. He wants banks to make it easier for customers to switch current accounts and to make charges clearer so they know when they are getting a bad deal. And he is calling for a Competition Commission investigation into the small business market.

The irony is that the government is getting tough on banks at a time when the market is at its most competitive. A decade ago, First Direct introduced telephone banking, sparking a revolution in the way people in the UK bank. Many customers now bank online, with Prudential's launch of its Egg savings account proving to be one of the most successful. Prudential led the way with Egg internet bank.

Increasingly banks have sought to get customers in the door by offering free current accounts and then make money by selling them life insurance and pensions.

The High Street banks are engaged in a never-ending battle to raise revenues and cut costs. Indeed, "High Street" may soon be a misnomer, as more of them close branches to cut costs. Even large profits do not guarantee that jobs are secure or that branches will stay open. Last month, Lloyds TSB revealed record profits of £3.62bn and plans to cut 3,000 jobs. The banks' defence to the charge of excessive profits is that their business is cyclical. When times are good they make large profits. In the 1980s recession, some banks, such as NatWest, were actually posting losses. High charges and poor service is what prompted the government to commission the report was the repeated allegations of high charges and poor service. Since then, the charge of rip-off Britain has gained political momentum.

The four main High Street banks - Lloyds TSB, Barclays, HSBC and National Westminster/Royal Bank of Scotland - have come under particular attack. Between them, they are estimated to have between 70% to 80% of current account and small business lending. With more and more current account providers setting up in the UK, banks can certainly argue that the market is competitive. But while there may be a choice of current accounts, it is still hard for customers to close down one account and open another. Often it is unclear which deals offer better value.

There has been concern expressed about the transparency of bank charges, financial deals and interest rates. Unwanted customers Banks have already come into conflict with the government in the area of financial exclusion, which Mr Cruickshank highlights. About one in five households does not have a current account with either a bank or building society. While these customers may not offer the banks much profit, it would make the government's life easier if they had bank accounts, allowing for ease of payment of, for example, social security cheques.

The cost of using cash machines is an issue that has been well-aired. Mr Cruickshank still maintains charges should be set between 15p and 30p, rather than the £1 banks have been talking about.

In a leaked excerpt from his report, he described the Link network of cash machines as "inefficient, anti-competitive and socially exclusive". He said: "There is a strong case for government intervention to remedy these failures." The recommendations in my report, if implemented, would open up to greater competition the markets for cash distribution and current accounts. "This would bring ATMs into new locations, enable a wider range of services to be delivered through ATMs to customers and allow new suppliers to compete on a level playing field."