Bank overdraft charges: avoid getting fleeced on your current account

[Legal Beagles]

The battle on bank charges is not over yet, but now is a good time to make sure that you are getting the best from your bank account, says Emma Simon.

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[Legal Beagles]

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[Shazzaw]

BBC Article - "Common sense on bank charges"

From the BBC website today.

http://news.bbc.co.uk/1/hi/business/7370923.stm

[Amethyst]

Re: BBC Article - "Common sense on bank charges"

Money talk
By Chris Warner
Lawyer, Which?



Somewhat earlier than expected, Mr Justice Andrew Smith has provided his judgement in the bank charges test case.
In what must be seen as a victory for consumers, he decided that the Office of Fair Trading (OFT) may assess whether or not unauthorised overdraft charges are fair.
Given the large amounts of money involved, estimated to be up to £3.5bn a year, his decision could have significant consequences for the UK's high street banks.
While the judge made it clear it was not for him to say whether the charges are in fact fair, what is now clear is that unauthorised overdraft fees need to be.
The banks argued that unauthorised overdraft charges could not be assessed by the OFT for fairness because they were fees paid by a customer in exchange for services provided by the bank, and they were explained in the banks' contracts in plain and intelligible language.
The judge disagreed with the banks on the first point - fees for service - but found in their favour on the second.
In doing so, the judge appears to have treated the issues with a great deal of common sense.
Fees for a service
The judge explained that a narrow meaning should be given to the term "fees in exchange for a service" to give full effect to the relevant legislation.

The Judge... decided that no service was provided when such a charge was imposed




Anything else would risk making the regulations' potential exemptions too wide, and this could undermine the main policy objective of the regulations, which is consumer protection.
If the charges were exempt from assessment then, in effect, the banks could charge an unlimited amount for unauthorised overdraft fees.
The judge then looked at the situation for unpaid item charges (UICs), such as for bounced cheques or rejected standing orders, and decided that no service was provided when such a charge was imposed.
The judge noted there was no obvious benefit provided to the customer in such circumstances, and that the typical customer would not consider he had been provided with a service.
In so finding, the Judge accepted the arguments made by the OFT that the "service" being requested by the customer was the provision of an unauthorised overdraft and not, as the banks had suggested, simply consideration of the customer's request to go into the red.
Paying the price
However, the judge found a different situation applied in relation to paid item charges (PICs).

The charges were not really being levied for the provision of the overdraft




These are incurred when a customer has their cheque or standing order honoured even though they have gone into the red, and have thus been provided with an overdraft, without prior agreement.
The real question in relation to PICs was, were they the "price" paid in "exchange" for the service provided?
Keeping to his common sense approach, the judge said that this question had to be answered from the position of the typical consumer.
The service provided - at least in the eyes of the typical consumer - is the provision of an overdraft or loan, and the "price" for a loan is usually the interest incurred.
All the banks charge their customers interest on an overdraft, and the interest reflects the amount borrowed and the duration of the overdraft.
So the judge accepted the OFT's arguments that it was interest, and not the PIC, that would be seen as the "price paid in exchange for the service".
The judge also noted that for most of the banks, the amount of their PICs and UICs were identical or at least very similar.
But given that an overdraft is provided in one circumstance but not the other, it suggested that the charges were not really being levied for the provision of the overdraft.
Plain intelligible language
The OFT argued that for the banks' contracts to be in plain and intelligible language, it was necessary that they explained everything the customer would need to know about the operation of his account.

The judge dismissed the OFT's arguments, finding that... those contracts were in plain intelligible language




The banks disagreed, arguing that it simply meant the words on the page had to be easy to understand.
The judge agreed with the banks: a customer did not need "an education in the full complexities of banking systems".
Instead, he needed to know when he would be charged, and what that charge could be.
The judge then looked at the "seven uncertainties" common to the banks' contracts as identified by the OFT.
Taking each of the banks' contracts in turn, the judge dismissed the OFT's arguments, finding that in all but in a few limited respects, those contracts were in plain intelligible language.
What next?
Given the banks lost on the first issue, their win in relation to plain intelligible language does, at first glance, seem largely devoid of significance.
However, it may not be.
In particular, I wonder whether it might prove to be a slight sting in the tail for the OFT as it undertakes its fairness assessment.
It is a necessary precondition to any finding of unfairness under the Regulations that the relevant terms are "contrary to the requirement of good faith".
The banks have argued that in this context "good faith" means fair and open dealing with their customers.
If the banks are right, then the fact that their contracts are in plain intelligible language would appear to give them the upper hand.
However, there is clearly more to ensuring consumers are not surprised by their contracts than making sure the long contractual documents are easy to understand.
Either way, the issue of good faith is certain to be a critical aspect of this saga over the next few months and may well be where the banks focus their attention - unless they appeal, that is.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

[Paule]

A lifeline for banks - The Economist Apr 24th 2008

EVER since the money markets capsized last August, top bankers have criticised Britain's central bank for a tardy and inadequate response to the gravest financial shock since the early 1930s. Now they no longer have cause to grumble. The Bank of England has taken a decisive step to restore confidence in the banking system.

The “special liquidity scheme” launched this week puts Britain's central bank at the forefront of international attempts to arrest the financial crisis. Although some have called the plan, which is likely to provide banks with at least £50 billion ($100 billion) of extra liquidity, a “bail-out”, Mervyn King, the Bank of England's governor, rejects that charge. He said on April 21st that the scheme was “designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks”.

The initiative is a modern version of the time-honoured centralbanking practice of ensuring that solvent banks do not trip up in troubled times for want of ready cash. The need for the Bank of England to reinterpret this sacred text has been apparent for several weeks. A telltale sign of the continuing distrust in and among banks has been the elevated interest rate at which they lend to one another for three months. This LIBOR rate, off which much lending is priced, is normally close to the central bank's base rate. The gap widened extraordinarily when the financial shock started last August (see chart). After falling back at the start of this year, the spread has recently opened up again.

The “special liquidity scheme” is similar to the $200 billion “term securities lending facility” which the Federal Reserve announced on March 11th. Like the American scheme, it involves the central bank swapping easily tradable assets for illiquid assets that the banks are holding. The British facility will let banks swap mortgage-backed and other securities for bills issued by the Treasury.
But three features of the British scheme make it more ambitious than its American counterpart. The first is that there is no cap on its size; and the expected initial take-up of £50 billion will be bigger, given the relative size of the two economies, than America's facility. Second, the asset swaps will not be provided through weekly auctions, as in America, but will be available to banks on demand at any time over the next six months. The third difference is that the swaps will be much longer than the Fed's, which extend for just 28 days. Instead they will last for a year and indeed, after renewal, for as long as three years.

Taxpayers are at risk, but there are several safeguards to protect them. Only high-quality securities will be accepted, and a fee will be charged. Banks will get less back in Treasury bills than the value of the assets they are swapping. For example, a bank offering mortgage-backed securities would receive roughly between 70% and 90% of their worth in Treasury bills; and it would have to provide more assets or return some of the bills if the value of the securities then fell. Taxpayers will have to pay up only if a bank defaults and the central bank has incurred losses on its swaps.

Although no explicit deal has been struck, the banks will clearly have to play a part now in resolving the financial crisis. But their side of the bargain will not entail steps to ease conditions in the mortgage market, as Alistair Darling, the chancellor of the exchequer, has suggested. The Bank of England has deliberately limited the assets eligible for the swaps to those existing at the end of 2007, which means that the facility cannot be used to finance new lending. Banks and building societies have been toughening the terms on which they extend new home loans and refinance old ones because they are recognising risk that they had underestimated before.

The Bank of England's scheme is designed to underpin the banking system, not to prop up the housing market. The quid pro quo expected of bankers is that they strengthen their balance-sheets. They must write down losses realistically and boost their capital. Painful though this will be, it is an essential part of rebuilding the financial system.

[Legal Beagles]

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