Bank charges: how the court ruling could affect bank customers

[Legal Beagles]

The battle begins over bank charges, writes Kara Gammell

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[Amethyst]

Re: Bank charges: how the court ruling could affect bank customers

Bank charges: how the court ruling could affect bank customers


Last Updated: 1:57pm BST 25/04/2008
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What does the High Court ruling about bank charges actually mean for consumers? As the battle commences we consider the possible consquences. By Kara Gammell
The Office of Fair Trading (OFT) has won a test case to establish that bank charges for unauthorised overdrafts come under "unfair contract" rules designed to protect the public. However, this is only the first stage in what could be an extremely long legal process.

Simeon Linstead, of comparison website www.uSwitch.com, the independent price comparison and switching service said: "The banks will fight this battle tooth and nail, especially given the current economic climate and its impact on the UK banking industry. Consumers should not be fooled into thinking banks will want to give up the extra revenue that excessive default charges brings in."
The ruling means the OFT now has the right to assess the terms and conditions underlying overdraft charges for fairness and decide whether unauthorised overdraft charges fall under the Unfair Terms in Consumer Contracts Regulations. Compensation claims could go back six years. Although thousands of customers have already reclaimed more than £500m in charges, over £700m is waiting to be reclaimed in stalled County Court cases due to a waiver granted to banks by the Financial Services Authority.
Kevin Mountford, head of current accounts at www.moneysupermarket.com, said: "As with the credit card industry, we may see a cap on charges and an increase in transparency on how customers are charged and what for. However, it is very likely this could trigger the end of free banking, meaning people who never abuse their banking facility will subsidise those who do. moneysupermarket.com research revealed fee-based banking would not be a popular option – with just nine per cent saying they would choose to pay a fee for each transaction or an upfront monthly or annual fee instead of the current system.
"We know one thing for sure; banks will not take this lying down and will find other ways to maintain profits regardless."
Banks are estimated to raise up to £3.5bn each year from the overdraft charges, with account holders paying up to £38 every time they go over their limit.
Abbey, Barclays, Clydesdale, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland, and Nationwide participated in this week's litigation. They account for about 90 per cent of personal current accounts in the UK.
People who go into the red regularly should choose an account with low overdraft charges or low fees, while those with money left over each month would be better off with an account that pays a decent rate of credit interest.


Alternatively, they could set up a standing order each month so that surplus cash can be redirected into a high-paying savings account.
Many people still labour under the misapprehension that if they are in debt they cannot switch providers. But banks are often more than happy to take on such customers, provided they can manage their debts sensibly and do not breach lending limits. After all it is these customers, who pay interest charges, that can prove the most lucrative for the profit-hungry banks.
Switching is easy. You just tell your new bank the details of your old bank, and most current account providers have a switching service that will switch all your direct debits and standing orders.
Under the Banking Code your old bank is required to give your details to your new bank within three days. And if a direct debit or standing order payment is missed and you incurred a loss as a result, the bank responsible will compensate you.
Some banks, but not all, will contact your employer and deal with switching your salary into the new account, so make sure with your boss that your salary is going to the right place. And if you are going to make the switch, choose a date just after the bulk of your standing orders and direct debits have gone out of your account.
Some financial experts predict the ruling is makes us one-step closer to the end of free banking.
Mr Linstead said: "OFT figures state that banks make £3.5 billion every year from these charges – a staggering £400,000 an hour. This is potentially a huge loss of income which the banks will be forced to recoup.





"If they can no longer just get this money from consumers that repeatedly incur bank charges, it will have to be taken from all of the UK's 40m current account customers in order to spread the financial burden. Ultimately, all consumers will have to pay the price for people that do not comply with the terms and conditions of their current account and could end up having to pay for every banking transaction carried out."
David Black, principal consultant of banking at statisticians Defaqto agreed. He said: "If, as seems likely, a cap is imposed on unauthorised overdraft charges, it is inevitable that the current account options will change for consumers."
But what about those people who already made a claim? These have been put on hold since the case was announced last summer, after the FSA granted a waiver allowing banks to postpone considering complaints. Further hearings are expected which could delay the cases.
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This ruling will signal the start of a lengthy legal appeals process considering it took four years it took to conclude the legal dispute over whether overseas credit card transactions are covered by the protection of section 75 of the Consumer Credit Act.
Mr Mountford said: "After many months of uncertainty, the Office of Fair Trading is now free to intervene on overdraft charges, setting what it feels is a fair rate. However, this will be a complicated and lengthy process, and consumers should not expect to know their fate for a long while yet. It is also likely that the banks will appeal, further delaying the saga. Research from uSwitch.com estimates that more than one million consumer claims have been on hold since July 2007 awaiting refunds on default charges, totalling more than £713 million. From the start of the claims freeze to January 2008, banks have made £20.5 million in interest on this money. Meanwhile, consumers waiting to reclaim these funds remain out of pocket for the foreseeable future."
Doug Taylor, Which? personal finance campaigns manager, said the banks should do the right thing now: concede defeat, agree with the OFT what constitutes a fair unauthorised overdraft fee and refund their customers as soon as possible.
He said: "The FSA must now drop its waiver so that the thousands of cases pending in the county courts and Financial Ombudsman Service can be processed. Every second that this issue remains unresolved is costing consumers up to £111 in overdraft charges."
Although the regulations on unfair terms in consumer contracts apply in Scotland, it has a different and independent legal system from that in England. The courts will consider any limitation period regardless of whether it is raised by either side in a bank charges case. People living in Scotland should take independent legal advice on their rights as the timing of a claim could be significant. It may be important to lodge a court claim in order to protect your position although you will still be able to go the Ombudsman.
The FSA has told the banks that they must continue to process claims where a customer is suffering genuine financial hardship. If you think you are in this category, make sure you state this clearly to your bank. If your bank ignores you or does not take proper account of your hardship, contact the Ombudsman. Cases of financial hardship will be dealt with by the Ombudsman, whose office can be contacted at www.financial-ombudsman.org.uk


You can still make a complaint to your bank using the information our templates www.telegraph.co.uk/bankcharges. However, your claim will be frozen until the outcome of the test case, but it is best to lodge a claim with your bank, rather than await the outcome of the test case.
BEFORE SWITCHING YOUR BANK ACCOUNT...
1 Calculate whether interest paid on credit balances exceeds charges on overdrafts and any other fees you incur.
2 Find a bank where it is easy to switch. Several have set up specific teams to deal only with switching
3 Beware that some of the best current account offers may require minimum sums to be paid in each month
4 Consider your priorities and personal circumstances. For example, some of the best deals are available online or over the telephone but some customers may prefer a bank with branches near their home or work.
5 Save money with direct debits as companies often offer discounts when paying in this way
6 Remember that the easy way to avoid unauthorised overdraft charges is to ask before you borrow.
7 Consider whether you would use the perks, such as free travel insurance, offered by packaged current accounts, before paying up to £ 15 a month
8 Consider an offset mortgage if you are a higher rate taxpayer who keeps a high credit balance
9 Discover what a bank is good at and if that is what you want, for instance, cheap loans or cheap credit cards.
10 Be prepared to complain to your bank and, if you receive an unsatisfactory response, contact the financial ombudsman on complaint. info@financial-ombudsman.org.uk or on 0845 080 1800
Case studies
Tales of the unexpected
By Emma Simon
Liam Hogbin, a teacher in Kent (pictured above), successfully claimed back more than £600 from Barclays last summer. Initially he put in a claim for more than £1,000 but eventually accepted a partial settlement.
He said: "At the time I knew that I could probably have got the full refund if I had pursued the claim further, either by taking it to the Financial Ombudsman Service or through the small claims court." But he says he was concerned that such a move could backfire and he could end up with nothing.
"As it is, I think I was paid just before these claims from put on hold, so it would have been unlikely I would have got anything before this court case." Liam, 29, added that he felt this was a "reasonable settlement".
"Although we all complain about bank charges, I certainly never expected them to get refunded."
He said that he looked at all charges incurred over the past six years. Most of these charges were levied when he exceeded his overdraft limit or when a direct debit was paid when there were insufficient funds in his account.
He added: "Some of these charges were pretty Draconian, and I was hit by a £30 fee for going £1 over my limit."




But he concedes that he probably should at times have kept a closer eye on his financial situation. He added: "Claiming the money was fairly straightforward and I would urge anyone in a similar position to apply for a refund."
Angela Hutchins: hoping for some cash back Hoping for a green light
By Emma Simon
Angela Hutchins (left) hoped the court case would give her the green light to pursue a claim against her bank.
She said she first started incurring bank charges two years ago, after being forced to leave her work through illness. She now cares for her children at home.
She said that although she has tried to keep her finances under control, it hasn't been easy with the bank taking charges of up to £35 a time if there is insufficient funds in her account. This then pushes her further into debt, resulting in more bank charges.


She said that Abbey has refunded some charges on an ad hoc basis but she has been unable to get all the charges refunded. After having difficulties dealing with the bank direct she is using a claim handling service.
"If I am able to take this further, I am hoping they will be more successful," she said.
Angela said that she realises they will take part of any settlement as a fee but added that she was not optimistic that she would get a positive result without them. She estimates that she paid more than £1,000 in bank charges in the past couple of years.