Why unfair charges may go despite court ruling

Published on Friday 27 November 2009 19:44

THE banks' victory in the Supreme Court this week gave them the green light to continue charging high overdraft fees, but the days of "free banking" remain numbered.

The Supreme Court ruled on Wednesday that the Office of Fair Trading (OFT) could not investigate the fairness of overdraft charges, overturning earlier rulings in a test case that began in 2007.

The OFT is now considering its options – which include returning to the courts under a different section of the unfair contracts rules or instigating a lengthy Competition Commission investigation – while the Treasury is pressuring the banks to reach an agreement with the OFT on a voluntary code governing overdraft charges.

Adam Phillips, chairman of the Financial Services Consumer Panel, called on the OFT and Financial Services Authority (FSA) to engage with the banks to work towards fairer charges.

"If banks are serious about treating customers fairly, they should realise that it's not fair to fund their retail banking operations through charging high rates to one section of their customers," said Phllips.

Wednesday's surprise ruling dealt a massive blow to millions of bank customers hoping to be refunded overdraft charges dating back to 2001. Around 560 million had been paid out in overdraft refunds by July 2007, when claims were put on hold until the test case was over.

But while refund hopes have been dashed, the court case and the public outcry over excessive charges has sparked more competition in the current-account market. Charges of 35 or more for going overdrawn are now increasingly rare, with the banks amending their charging structures over the past two years in an apparent admission of their guilt.

The shift towards fee-based banking may no longer seem inevitable after the OFT's defeat, but fundamental changes in the current-account market are certain, with more packaged accounts in which services are tiered and monthly or annual charges levied.

Kevin Mountford, head of banking at moneysupermarket.com, said he expected the OFT to continue pressing for a system where the costs of running current accounts are spread more fairly across all customers.

"In truth banks have already started to respond to this – for example we've already seen a big move from banks towards so-called packaged accounts where you pay a monthly fee but get added benefits such as travel insurance thrown in. We expect this trend to continue and in return for fairer overdraft charges, banks could introduce transaction fees, or monthly and annual fees."

David Black, banking specialist at researchers Defaqto, said the evolution of current accounts since the overdraft charges furore erupted would continue.

"Over the past 18 months many banks have changed their overdraft tariffs – for both authorised and unauthorised overdrafts – and it remains extremely difficult for consumers to compare the different deals available."

In the wake of the OFT's defeat, the onus is on consumers to put pressure on banks by taking their business elsewhere if they are believe they are being treated unfairly. Currently just 6 per cent of people switch their current account every year, but there is no longer an excuse for apathy, said Black.

"People should wake up to the fact that they don't have to stay with the same current account and should not be afraid to switch to get a better deal."

Current account holders getting hammered by high overdraft charges are a case in point, with a growing range of alternatives available.

RBS and Bank of Scotland are among the banks to have introduced significant changes to their overdraft charges in recent weeks. RBS made its move in October, reducing charges for bounced cheques, direct debits or standing orders from 38 to 5, while the monthly fee for having an account in overdraft was cut by 8 to 20.

Bank of Scotland's new structure comes into force next month but the 1-a-day system has attracted fierce criticism from customers and consumer groups, angered at the impact on low-income customers with small overdrafts.

Customers with authorised overdrafts up to 2,500 will pay 1 a day each day they are overdrawn, with the charge doubling for authorised overdrafts above 2,500. Unauthorised overdrafts face daily charges of 5, although no other overdraft fees will be charged.

TOP ACCOUNTS FOR OVERDRAFTS

ALLIANCE & Leicester, Abbey and Barclays all offer a 0 per cent authorised overdraft for a year, moving to 12.9 per cent thereafter. To take advantage of the Barclays and Abbey accounts, you need to switch from another provider and pay in at least 1,000 a month, while the Alliance & Leicester deal demands a 500 monthly deposit.

Elsewhere, internet bank Cahoot has a 100 interest free overdraft and an authorised overdraft rate of 11.8 per cent APR on balances up to 1,000.

Look out for steep charges for unpaid items (such as bounced cheques) or payments that force the account into overdraft, however. Abbey and Clydesdale charge up to 35 for both, while Nationwide charges 30 for unpaid items.

For unauthorised overdrafts Alliance & Leicester charges 5-a-day for a maximum of 20 days a month, capping the fee at 100 a month. Unauthorised charges, such as unpaid items, are charged at 25 for transactions over 10, with no charge below that.

Barclays is also relatively easy on customers going overdrawn without permission, with a 22 monthly fee plus 8 a time for unauthorised payments.