Eight banks have lost an appeal aimed at stopping the investigation into overdraft charges, so the legal battle goes on.
We have cheery news for fed-up banking customers: the banks have lost their latest attempt to halt the Office of Fair Trading (OFT) investigation into unfair overdraft fees charged by current accounts.
The OFT wins round one
Eight banks -- Barclays, Clydesdale, HBOS, HSBC, Lloyds TSB, RBS and Nationwide BS -- argued that the OFT did not have the authority to investigate whether their charges for unauthorised overdrafts were unfair and, therefore, unenforceable. The Court of Appeal disagreed and backed the OFT.
Although this means that the OFT can continue to look into overdraft charges, the banks may seek permission to appeal to the House of Lords. Of course, this works in the banks' favour, as it slows down the investigation and enables them to continue to pocket around £300 million a month in fines.
Also, it's important to understand that this victory -- though welcome -- is just one small step in the long campaign to establish that overdraft penalties are unfair. Success at this stage only means that the OFT can carry on investigating overdraft charges for fairness -- a process it began in July 2007. Indeed, with all the foot-dragging going on, we could be two years away from a final ruling on whether these charges are, in fact, unfair.
Meanwhile, tens of thousands of county court cases and complaints to the Financial Ombudsman Service (FOS) are frozen in limbo, suspended until the final ruling is known. Thus, millions of us will have to dig in for a long haul, as it could be 2010 or 2011 before we will find out whether we can claim a refund of these charges.
Fees or fines?
The banks continue to argue that overdraft charges are a fee for a service, and not a penalty for breaching overdraft limits. Indeed, the British Bankers' Association (BBA) strenuously denies that the 1999 Unfair Terms in Consumer Contracts Legislation covers overdraft fees. Alas, the BBA is merely a mouthpiece for the banks and is, therefore, no friend of consumers!
Naturally, I disagree with the BBA and its members, as overdraft fines greatly exceed the actual cost of administering and monitoring accidental or deliberate over-borrowing. For example, some banks will charge up to £38 for rejecting (bouncing) a payment if funds are not available. However, they also levy a similar or identical fee for accepting a payment which increases an unapproved overdraft.
When I worked in account management for a major insurance company, we would charge our client -- a leading bank -- an admin fee of just £1 if a customer's insurance premium bounced or was returned unpaid. Thus, if my company made a profit from this charge, then how can banks justify charging 38 times as much?
Some banks have seen the light
As things stand at present, banks can go on levying rip-off charges on unapproved overdrafts, but consumers' right to reclaim these excessive fees has been suspended. Nevertheless, some banks have seen which way the wind is blowing, and have responded by reducing penalty fees or by altering their charging structure.
Some current account providers have introduced daily fees, lower one-off fees or tiered fees based on the amount of a bounced payment. In particular, Halifax deserves special praise for introducing its Reward Current Account, which charges a flat fee of £5 a day on unauthorised overdrafts. This is a fraction of what other banks shamelessly charge.
For instance, Royal Bank of Scotland and NatWest charge £38 per unpaid item (maximum three per day). So, a one-day overdraft at RBS or NatWest could cost a whopping £114 (plus a monthly fee of £28 on top), versus £5 at Halifax or £8 at Barclays. In addition, Abbey has the cheek to charge £35 for every payment which is bounced or increases an unapproved overdraft (Yorkshire Bank levies the same fine for unpaid items).
What will the future hold?
One thing about this ongoing saga worries me more and more. As we know, the credit crunch and economic downturn have inflicted severe losses on British banks. Indeed, Bradford & Bingley and Northern Rock are entirely owned by taxpayers*, while Lloyds Banking Group and Royal Bank of Scotland have been partially nationalised. Thus banks' balance sheets have been dynamited, leaving them weak as the proverbial kittens.
My fear is that, if the OFT rules in favours of consumers, banks will be unable -- and unwilling -- to forego the mighty profits which they trouser from overdraft fines. As a result, they are highly likely to put up a fight when it comes to handing over billions of pounds in refunds. Furthermore, in order to make good this massive loss, they need to find other sources of revenue.
With credit interest rates already close to zero, cutting rates is no longer an option. Thus, I expect banks to introduce wide-ranging fees for all banking customers. So, as ever, it's heads banks win, tails customers lose!
* Why should taxpayer-owned banks, such as B&B and the Rock, fine us for borrowing our own money? If ministers have any sense, they will order these organisations to stop fining hard-pushed borrowers!
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