PENALTY CHARGES: WARNING TO WATCHDOG
Banks are threatening to end free personal banking if a consumer watchdog too severely curtails what they make from penalising customers who exceed their borrowing limits.
Midland Bank, now part of HSBC, first introduced free banking in 1974, with other banks following suit and agreeing not to charge customers on current accounts as long as they remained in credit or within their overdraft limit.
But the Office of Fair Trading is this week poised to clamp down on penalty charges, which prop up the entire edifice of free banking in the UK.
Apart from threatening to end free banking, the banks are considering increasing interest rates on credit cards and reintroducing annual fees on them.
A senior official in a major Scottish bank warned his organisation could be forced to call time on free banking if the watchdog too severely limits average £32 penalties for a bounced cheque or average £22 fees for late settlement of credit cards. He said: “One consequence of this could be the end of the road for free banking.”
Earlier, a Credit Suisse report said the OFT’s expected clamp down on penalty charges would cost UK banks around £1.65 billion in lost profits.
The OFT first told banks and credit card companies last July that they needed to cut the “excessive” penalty charges levied on the late payment of credit card bills. The OFT might cap the charge at between £10 and £15, against the current average of £22.
Taking guidance from several recent court cases in which angry customers have obtained four-figure settlements from their banks, the OFT is expected to apply a similar limit to current account charges.
Earlier this month, Brian Mullen, 29, won a landmark court ruling against Lloyds TSB. The accountant claimed that nearly £2,000 of penalty charges levied by a Lloyds branch in Manchester had been removed from his current account illegally. He argued the penalty charges were unlawful since they made money for the bank rather than simply allowing it to recover costs.
Lloyds failed to defend Mullen’s claim and judgment was awarded in his favour last month. When the bank failed to settle the bill, he sent bailiffs to the branch to seize bank assets.
The OFT, led by Irishman John Fingleton, wants to ensure penalty fees more accurately reflect the actual costs involved for banks and credit card issuers. Industry sources suggest it costs banks less than £10 to levy a penalty charge, with some believing a few pence is closer to the mark.
Credit Suisse estimates that were penalty charges to be capped at £10, British banks would lose £1.2bn in profits. If charges were capped at £5, the banks’ profits would tumble by £1.65bn. Jonathan Pierce, banking analyst at Credit Suisse, said: “The arguments relating to penalty charges are a matter of contract law. The OFT is acutely aware of this and following a protest outside its offices on 3 March, it is expected to issue a statement very soon.”
He estimates that, with a £5 cap, RBS would see profits fall by £385 million, HBOS by £237m, Barclays by £360m, HSBC £275m and Lloyds by £358.
Note: This article was the first to suggest UK banks were using the potential removal of “free” banking as a threat to persuade the UK government and regulators against capping charges levelled on customers who exceed borrowing limits.
The article was published in the Sunday Herald on 26 March 2006