Office of Fair Trading raises landmark court action against UK banks
BANK CUSTOMERS could face a “blizzard of additional charges on their current accounts” if the Office of Fair Trading wins its court case against the UK’s largest banks over the fairness of what they are charging customers for unauthorised overdrafts.
Should the OFT win the test case early next year, to correct what it claims is a system that enables bank to rake in between £2 billion and £3.5 billion in unauthorised overdraft charges each year, the banks and building societies would probably have to pay out billions of pounds in refunds and compensation. It would also likely limit the charges they levy on unauthorised current account overdrafts in future.
“The banks are already looking at ways of recouping the roughly £2bn a year they make from unauthorised overdraft charges,” said a senior industry source. “It could make this a pyrrhic victory for consumers. I think consumers are going to have to brace themselves for a blizzard of additional charges on their current accounts.”
It has already been suggested that an OFT victory in the imminent court case could signal the end of “free banking” — something to which UK consumers have grown accustomed since the 1970s.
Already, the HSBC subsidiary First Direct is charging a £10 monthly fee for current account holders who do not pay at least £1,500 in monthy salary into their accounts. Monthly or annual charges for current accounts are standard practice in continental Europe.
Credit Suisse analyst Jonathan Pierce said: “The banks will want to recoup any lost revenue. The big question is whether they will be able to get it all back.”
He estimated that UK banks currently earn about £1.5bn to £2 billion a year from charges for unauthorised overdrafts — when current account customers breach their overdraft imits without bank approval or authorisation — money which he believed they could recoup at a stroke by charging 20p for every cash machine transaction.
The OFT believes that its test case, in which it is being represented by barrister Brian Doctor QC, will clarify a legal principle over whether the charges levied by banks on unauthorised overdrafts and on returned items are unfair.
In what has been described as risky and expensive move, the OFT is making the test case against three Scottish banks (Clydesdale, HBOS and Royal Bank of Scotland), four English banks (Abbey, Barclays, Lloyds TSB and HSBC) and one building society (Nationwide). The case is to be heard in the High Court in London some time between 14 January and 28 February.
One of the reasons for the test case was to set the legal parameters over the banks’ behaviour. In recent months UK consumers have made thousands of complaints against their banks both in county courts and to the Financial Ombudsman Service. In many of these cases, banks have paid out compensation without bothering to show up in court.
Several dedicated websites have sprung up on the internet, including www.claimingbackbankcharges.com, aimed at assisting claimants. Credit Suisse’s Pierce said that Britain’s banks set aside £400m to pay back penalty charges in the first six months of the year – equivalent to 2% of their profits.
Last week John Fingleton, chief executive of the Office of Fair Trading, told BBC radio: “What we hope to achieve by it is a very fundamental change in the behaviour of banks in the market place. So that they treat customers well, no tricks, no hidden extras, the pricing is fair and simple to understand. At the moment, that’s not the case.”
The banks currently hit customers with fees of up to £39 for bouncing a payment or going over an agreed overdraft limit, even though campaigners argue the actual cost is more like £2.50.
But Angela Knight, chief executive of the British Bankers’ Association said: “The banks have made it clear that they see the unauthorised overdraft fee as a fee for a service.”
This article published in the Sunday Herald on 18 November 2007