Jeff Salway: Watchdogs' bark worse than bite concerning overdraft charges

THE banks have been on the ropes but the failure of the authorities to exploit their advantage will prove costly for consumers.

High street banks and credit card providers have been on the retreat for more than two years, subject to scrutiny on overdraft charges, credit card lending and the way in which they handle customers in financial difficulty. However, it has become clearer this week that the watchdogs doing the barking did not have the appetite to sink their teeth in when their prey started whimpering.

The government and the Office of Fair Trading (OFT) have stopped short of introducing the measures necessary to improve consumer protection and compel the banks to mend their nefarious ways. On Monday the government revealed that it had reached agreement with credit and store card companies over new rights for consumers.

The good news was that credit card providers will now have to use customer repayments to reduce the most expensive debts first.

Currently the cheapest debts are prioritised in a practice that means borrowers take longer to repay interest, earning the banks an estimated 250 million a year. This will not be without its repercussions, however, because credit card providers will presumably seek to recoup the lost revenue through higher interest rates, potentially signalling the end of 0 per cent introductory deals.

But the government blinked on its proposals to ban unsolicited credit card increases, instead giving borrowers 30 days in which to reject the rise. The government backed down in the face of industry pressure, yet this was one of the more black-and-white proposals. If someone needs a higher limit, what is the problem with an opt-in approach that compels them to request it, as and when it is needed? The practice of bombarding often vulnerable customers with offers of extra credit is exploitative.

Similarly, the government climbed down over proposals to increase minimum repayment levels. At first glance this seems sensible at a time when more people are defaulting on repayments, but the reality is that the banks pressured the government into a reversal because of the interest revenue they rake in over the time it takes customers to pay off their debts. As Defaqto pointed out, someone making the minimum 2 per cent monthly repayment on a 1,000 balance on a card charging 20.9 per cent would take 37 years to clear the balance. Yet by repaying 50 a month that balance can be paid off 35 years earlier.

The review also failed to address the problem of store cards, handed out by untrained shop assistants with no explanation of the compounded repayment costs. Nor did it consider a limit on the number of credit cards an individual can take out.

So that was Monday's climbdown. On Tuesday it was the OFT's turn to compromise in the face of complaints from banks, this time regarding overdraft charges. The battle against unfair overdraft charges ended with a whimper after nearly three years of investigations and a test case in which the OFT sought permission to rule on the charges. When the case was kicked out by the Supreme Court late last year, the OFT was expected to follow a new legal avenue. Instead, it has given up, publishing proposals shaped by so-called commitments from the banks.

Rather than forge on and seek to impose a cap on overdraft charges, the OFT will now rely on the banks to resist the temptation to charge excessive fees for unauthorised overdrafts. It said it was satisfied with a reduction in the average overdraft charge from 34 to 17 since 2007, forgetting it was its court case and the surrounding publicity that persuaded banks to adopt a more reasonable approach to the charges.

This will not stop the march of the fee-based current account. HSBC proved as much on the same day as the OFT's report by unveiling an account featuring a strict overdraft limit that cannot be exceeded unless the bank has "formally agreed a higher limit beforehand". How this differs significantly from the conventional overdraft arrangement is not clear, unless you count the 15 a month – 180 a year – charge for the account. The banks have businesses to run. But the OFT has consumers to protect when those banks fail to meet their social obligations, and after three years of pursuing a fairer approach to overdraft charges it has let the banks off the ropes with a powderpuff compromise.