Customers of Halifax, owned by taxpayer-backed Lloyds Banking Group, are staging a revolt as the banking giant slashes rates on its current and savings accounts and drives out mortgage borrowers from Intelligent Finance, its online arm.

The protest comes as the European Commission prepares to impose penalties on Lloyds (and Royal Bank of Scotland) for receiving billions in state aid.

The commission is expected to rule within days that Lloyds should sell parts of its business to reduce its stranglehold on the market.

Lloyds dominates the current account market with a 30% share, of which Halifax has about 14%. The group also has 30% of the mortgage market, with Halifax at about 20%. The commission wants the banking group to trim its key market share by about 5%.

Commentators said that the bank appeared to be making its products less competitive to drive away customers and discourage new business to reduce its market share naturally.

Michelle Slade of Moneyfacts, the personal finance website, said: “Many state-owned banks now offer less competitive deals than rivals, effectively driving away customers and so reducing market share.”

Sunday Times Money has been inundated with e-mails and letters from customers of Halifax, including Bank of Scotland and Intelligent Finance.

Halifax and Bank of Scotland current account customers are angry that from December 6 they will no longer earn interest when in credit, while also facing hikes of up to 2,000% in their authorised overdraft rates. Halifax, Bank of Scotland and Intelligent Finance also cut their savings rates last month — even though Bank rate has been on hold at 0.5% since March.

Meanwhile, analysis by L&C Mortgages, the broker, found that deals from Halifax and Cheltenham & Gloucester (C&G), Lloyds’ mortgage arm, have become less competitive since their merger at the start of the year.

Intelligent Finance, the popular offset mortgage provider, has also come under fire for no longer allowing customers to take their cheap mortgage deals with them when they move to another property — even though this was one of the reasons they signed up.

Jonathan Todd, a spokesman for the European Union’s Competition Commission, said that he expected a ruling on Lloyds within days. “We want to ensure that banks that received substantial state aid do not have a competitive advantage over those that did not,” he said.

“State-owned banks have three options — they can demonstrate a reduction in new lending; have caps on retail deposit balances [savings]; and ensure they do not offer the most competitive rates on loans [mortgages].”

Here we assess whether it is time to ditch the bailed-out bank, and give some alternatives.

CURRENT ACCOUNTS

From December 6, all Halifax customers, excluding students, will face the double whammy of losing credit interest and a potential 2,000% increase in their agreed overdraft rates.

The move is a blow to millions of customers who signed up to Halifax and Bank of Scotland’s high interest accounts two to three years ago when they were heavily advertised as paying significantly more interest than its high street rivals.

At Bank rate’s peak in 2008, the account was paying 5% and it currently has an interest rate of 1%, but from next month this will drop to 0%. Customers have the option to switch to the Reward account, which pays a flat £5 if they pay in at least £1,000 a month.

On authorised overdrafts, Halifax currently charges a typical interest rate of 18%, but from December 1 it will instead charge a fee of £1 a day if customers go into their agreed overdraft limit by up to £2,500. Above this amount, they pay £2 a day.

A customer who used £100 of their authorised overdraft for just one day will see their charges go up from 5p to £1 — a 2,000% increase, according to researchers at Defaqto, the analyst.

Meanwhile, unauthorised customers who go over their overdraft limit will pay £5 a day instead of the current fee of £28, with paid and unpaid item fees at £35 (subject to a maximum of three a day).

David Black of Defaqto said: “Good customers, who stay within their agreed limit, are being punished in favour of less careful customers. If you want to use an overdraft facility, you should consider switching away from this account.”

However, Mike Regnier, director of current accounts for Halifax, said: “Customers find the daily overdraft charging structure clear and easy to understand. We believe its introduction is the right thing for our customers.”

If you want to ditch Halifax and your account is generally in credit, the best accounts are the Abbey current account and Alliance & Leicester Premier Direct, which pay 6% (both are owned by Spanish giant Santander). They require £1,000 and £500 respectively to be paid into the accounts each month.

If you do not want to make regular payments, the best rate is from Cahoot, also part of Santander, which pays 1%.

The lowest authorised overdraft rate is also on Alliance & Leicester Premier Direct, which offers 0% for the first 12 months, then 50p a day up to a maximum of £5 a month.

VERDICT: DUMP

SAVINGS

Last month, Intelligent Finance cut the rate on its iSaver online account by 0.36 percentage points to 2.49%, while its cash Isa rate fell by 0.25 points to 2.5%.

Sainsbury’s Finance has an online account paying 3.2%, although this includes a 1 percentage point bonus until September 2010, so savers may feel it is not worth switching.

Intelligent Finance also remains competitive for Isas, despite the recent cuts. The top easy-access cash Isa is from Standard Life Bank at 2.65% — only 0.15 points more than Intelligent Finance’s rate.

A spokesman said: “Intelligent Finance remains in the best-buy tables; it still offers a pretty competitive rate.”

Meanwhile, Halifax has cut rates on its Extra Income Saver, its Isa saver, its Saver Reward and its Liquid Gold accounts by between 0.05 and 0.25 points. However, analysts said its savings deals remained relatively competitive. The average easy-access rate has dropped from 1.48% to 0.82% since the start of the year.

Average rates from Halifax have fallen at a slower pace, however, from 0.88% to 0.72%. Although this is below the average, Halifax’s best rate is 2.6% on its easy-access account, which is not far off the best-buy offered by West Bromwich building society at 2.85%.

Slade said: “The state-owned brands do offer some competitive deals, but anyone who has not switched for a long time is unlikely to be getting a good rate. The Halifax Liquid Gold account, for example, was one of the most competitive several years ago and still has a large number of savers invested, despite the fact it now pays one of the lowest rates on the market at 0.05%.”

VERDICT: STICK

MORTGAGES

Prior to the formation of the Lloyds Banking Group, two-year fixed deals from C&G were on average 5.61%, 0.32 points above the average best buy. However, today they are about 5.15%, 0.93 points above the best-buy deals, according to L&C, the broker — indicating that its deals for new loans have become less competitive.

Similarly, five-year fixed deals were an average of 5.67%, 0.16 points above the best buys before the merger, compared with 5.37%, or 0.91 points above, now.

Richard Morea of L&C said: “Deals have become less competitive and the fact that there is now less to choose between the two providers as they no longer have to compete with each other, means less choice for borrowers.”

However, brokers point out that C&G offers one of the best options on the market for existing borrowers who come to the end of their deals because its standard variable rate (SVR) is just 2.5%, compared with 3.5% at Halifax and an average of 4% across the market.

Ray Boulger of John Charcol, the broker, said: “C&G borrowers face a tough decision as they will revert to their lender’s market-leading SVR of 2.5%. Those who want security of a fixed deal will find it difficult to give up such a low rate.”

Halifax borrowers, on the other hand, could get a better deal if they remortgage to another lender. First Direct, part of HSBC, has a lifetime tracker at Bank rate plus 2.29%, or 2.79%, if you have a 40% deposit.

Customers who have come to the end of their deal with Bank of Scotland, which no longer offers mortgages to new customers, are rolled on to a high SVR of 4.84%, so for them it makes sense to move.

Meanwhile, Intelligent Finance has angered customers by changing the terms of its offset deals. Borrowers who move house before April 2010 can take their mortgage with them — known as “porting” — only if they do not need to borrow more money. After that date, they cannot take their current mortgage with them.

If you do need to borrow more, and still want an offset deal, Boulger suggests the First Direct tracker at 2.79%.

VERDICT: STICK WITH C&G, DUMP HALIFAX

My rate will rise by 800%

Victoria Wressell, 31, from Grimsby, says changes to her Halifax overdraft rate will come at the worst possible time.

“I usually go over my limit at the end of every month and it costs me only a few pence. From December, however, when I’ll be doing Christmas shopping, I’ll have to pay much more for the overdraft.”

She calculates that her average cost for using the overdraft will rise by as much as 800% when Halifax changes from charging a monthly rate to a flat £1-a-day fee.

“It means I will immediately lose the use of about £250 a month unless I want to pay heavily for it.”

Victoria, who lives with her husband Michael, 37, a store manager, and their three children Lauren, 13, Michael, 10, and Ella, 6, also says she is unlikely to switch providers any time soon.

“It’s just the hassle of it all, having to change direct debits and other standing orders. However, after Christmas I will seriously consider switching.”

Breakdown cover? I don’t drive

Olga Mitchell, from St Andrews, Fife, only recently discovered she had been paying £7.95 a month for a Lloyds TSB Select Account that offers AA breakdown cover and international mobile phone insurance. Olga, 90, who has not driven for 20 years and has not been abroad for 35, agreed to the deal after a phone call from the bank telling her she would be better off.

Her son discovered she was paying the fee. Lloyds agreed to switch Olga to another account and pay £300 compensation.