Banks are charging more for unauthorised overdrafts that it costs to provide them, a competition watchdog has said.

The Office of Fair Trading said that although banks claim the charges pay for a service, the services were not benefiting the customers, but the banks themselves.

It also warned that the terms relating to unauthorised charges are "liable to mislead customers", and are not written in "plain intelligible language".

The comments come as the body prepares its information for a High Court test case over unauthorised banking charges. The OFT and a number of high street banks jointly launched the action to finally establish if the charges are fair.

Currently, banks in the UK are thought to be accumulating between £2bn and £3.5bn annually through unauthorised overdraft fees charged when customers go over their agreed limits.

As much as £39 can be charged for an unauthorised overdraft, while the actual service costs a bank as little as £2.50, the watchdog said.

Amid thousands of people applying to recoup unauthorised overdraft charges, banks are now claiming they are justified as the money spent helps provide a service to decide whether the customer can have an overdraft in the first place.

They claim an unauthorised overdraft is technically a temporary loan, and that the customer is charged with this in mind.

Providers also warn that if the charges are scrapped, it could mean an end to free banking in Britain and lead to the introduction of monthly fees on current accounts.

But the head of the OFT, John Fingleton, said the body's research shows "free banking" does not exist in Britain, as banks are generating millions in "hidden extras" and "stealth" charges.

"We don't have free banking at the moment," he said.

"At the moment, consumers pay for banking through surprises and through stealth, they don't see what they pay and very often they pay when an unexpected event happens like an unauthorised, unexpected overdraft."

He added that he hopes the High Court case will lead to a "fundamental change" in the behaviour of financial providers.

The hearing is due to begin early next year.

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