Banks are making up to £3.5 billion a year from overdraft penalty charges, the Office of Fair Trading (OFT) said yesterday.

The watchdog said that banks were making between £2 billion and £3.5 billion a year from the penalty fees levied when account-holders exceed their authorised overdraft limit.

The charges, which critics claim are illegal, can be as high as as £30 a day.

Cavendish Elithorn, a senior director at the OFT, said: “The range is broad as the figures are still subject to analysis.” The OFT was unable to say how much of this revenue was profit.

The British Bankers’ Association said that it could not confirm the figures. A spokeswoman said: “These figures are commercially confidential, and they are not figures that the BBA has been provided with.”

Hundreds of thousands of holders of current accounts have already reclaimed unauthorised overdraft charges from their bank in the past year, claiming that they are illegal.

The five biggest banks paid out more than £400 million in refunds in the first half of this year alone.

The OFT launched an investigation into overdraft penalty charges at the beginning of January, but the banks argued that the charges were a core term of current accounts, meaning that the OFT had no authority to recommend changes.

To clarify the position, the OFT and eight leading banks, including HBOS, Barclays, HSBC and Lloyds TSB, said in July that they would go to the High Court.

Since then, all applications for refunds have been frozen until the High Court’s decision, although the banks are still allowed to apply the charges to their customers’ accounts.

The High Court case is due to be heard in January next year.

Some experts fear that holders of current accounts could lose out as the case could drag on for a year or more if the losing side appeals against a decision.

Neither the banks nor the OFT have ruled out the possibility of an appeal.

Other sources fear that the OFTs revelations about how much the banks make from the charges could slow the whole process up as the banks remonstrate with the OFT about revealing the figures.

Some banks have already started to change their overdraft fees ahead of the OFT concluding its investigation into overdraft charges.

HSBC said last week that it would alert customers who withdrew money from one of their 3,500 ATM machines if their transaction would push them over their overdraft limit.

Lloyds TSB has also changed its overdraft charging structure, cutting the interest charged for unauthorised borrowing, sending mobile phone text alerts to those close to their overdraft limit.

But the bank faced criticism for introducing even more hefty daily penalty charges for customers who go over their limit.

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