High fees make up bulk of UK banks' retail account profits - watchdog says

(Adds detail on aims of review)

By Emma Rumney and Huw Jones

LONDON, June 27 (Reuters) - Overdraft fees paid by a small number of customers make up the bulk of profits on current accounts for Britain's retail banks, a report from the industry regulator showed on Wednesday.

The report is part of the Financial Conduct Authority's wide-ranging review of the retail banking business in Britain, which is dominated by just a few big banks. Its findings show that customers least able to pay face some of the highest fees for retail banking services.

Six banks, including HSBC, Lloyds, Barclays (LSE: BARC.L - news) and Royal Bank of Scotland (LSE: RBS.L - news) , represent over 80 percent of the personal current account market in the country.

The regulator has tried before to curb banks' retail banking fees and charges, such as on overdrafts, but its efforts were successfully challenged by the banks in the courts.

Customers whose accounts are in credit usually pay no fees for their account unlike in some countries in continental Europe, where banks charge customers for their bank accounts.

But people with accounts that are "overdrawn" are charged fees and interest. Banks make money from fees on products such as overdrafts, which effectively cross-subsidise "free" current accounts.

The FCA's report found that one in 10 customers generate between a third and a half of all profits from British banks' current accounts.

"It provides more evidence that there is no such thing as free banking," Andrew Bailey, FCA chief executive said in a statement.

Politicians have criticised the current system where the less well off, who are more likely to have overdrafts, are subsidising those who can afford to stay in credit.

Bailey has said the aim was to find a "socially acceptable" level of cross-subsidy. He told reporters in May that he wanted to look at the "basic fairness" of how costs and charges are allocated by banks.

UK Finance, which represents the banking industry, said banks are developing and enhancing measures to help those who regulatory use their overdraft.

The FCA report also found that many consumers go to their current bank rather than shopping around when looking for other financial products.

More than half (52 percent) of current account customers also have a credit card with their bank, 48 percent have a personal loan and 32 percent have a mortgage.

The FCA's analysis showed that the main banks derive their competitive advantage from a combination of current accounts and many branches. The regulator is doing more work to understand the operating costs of retail banking and the impact of branch closures.

The reports findings will be included in the FCA's broader retail banking review, whose conclusions are due towards the end of the year.

"In particular, this evidence will inform the work we are doing on overdrafts, so we can fully understand the potential effects of the significant action we are considering taking in this market," Bailey said.

The FCA has powers to take action to cap charges as it has already done with interest rates charged by so-called pay-day loan companies. (Reporting by Emma Rumney and Huw Jones; editing by Simon Jessop and Jane Merriman)