High street bank Lloyds TSB has revealed it is to cut its penalty interest rates and reduce its unauthorised overdraft fees.

Bounced payments due to insufficient funds in an account will incur a £20 fee, rather than the current penalty of £35, and will be limited to a maximum of three a day.

The group said that interest rates on unauthorised overdrafts will also be trimmed to bring them in line with the rate for authorised borrowing.

And the bank said it has also undertaken a major overhaul of its overdraft policy to help customers avoid going overdrawn.

Lloyds TSB is one of a number of banks that has launched a case in the High Court with the Office of Fair Trading to establish whether the current fees for unauthorised overdrafts are fair.

But the group insisted its latest move, which will come into effect from November 2, is not an attempt to pre-empt the court's decision.

Instead it claims it is simply responding to feedback from its customers.

The group said research shows that the majority of people go over their account limit accidentally, and usually only by a small amount.

The bank is also introducing a text message service which will warn people when they are within £50 of their limit, and again when they are over their limit or if a payment is refused because of a lack of funds.

The service will initially be available free of charge until the end of this year, after which it will cost customers £2.50 a month.

The group said it will also give people who breach their account limit until 3.30pm on the day they overspend to pay more money into their account or increase their overdraft limit to avoid being charged.

Ian Larkin, managing director of consumer banking at Lloyds TSB, said: "We understand that it can sometimes be difficult for customers to keep tabs on their account and we want to make it easier.

"Our new text messaging service, which alerts people when they are getting near their limit, puts customers firmly in the driving seat."

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