Emma Lunn, Monday January 14, 2008
Unauthorised overdraft charges come under scrutiny this week in a court case that could have far-reaching consequences for millions of UK consumers - and possibly bring about the end of free banking
This week sees the start of a High Court test case looking into the overdraft charges banks and building societies charge their current account customers. Whichever way the result goes, it will have far-reaching consequences for millions of UK consumers - and could pave the way for the end of free banking.
Government watchdog the Office of Fair Trading (OFT) believes the overdraft charges imposed by banks and building societies - sometimes as much as £30 for going just a few pence overdrawn - are unfair. It wants the High Court to rule accordingly and force the big banks to lower their fees.
The past couple of years have seen thousands of angry consumers reclaim bank charges that outweigh the administrative cost of their misdemeanour - and many have enjoyed payouts running into four figures. To date, around £570m has been refunded to more than 330,000 account holders.
Yet the banking industry continues to insist that these charges are legal and represent a fee for a service and not a penalty. The banks also insist that these fees form a core term of their contracts with their customers.
Even so, the banks have so far opted to pay out rather than face their day in court. This has meant no legal precedent was been set and eventually the banks and OFT agreed that a test case was necessary to clarify the legal situation. That test case gets underway on Wednesday (January 16).
If the OFT wins, British banks could be forced to pay back billions of pounds in fees to customers who have been unfairly charged in the past. To recoup their losses, experts predict this will mean they will start to charge current account customers to run their accounts - something that can be done for free at the moment.
If the banks win, it will mean consumers will no longer be able to ask for a refund on the grounds of the charges being unfair or unlawful. Those who have already been paid, however, will be able to keep their money. In the meantime consumers can still complain about bank charges but their case won't be looked at until the result of the test case is announced.
Why do the banks want to charge us?
At the moment, if you run your bank account within an agreed overdraft limit and always have enough funds to pay direct debits and standing orders, everyday banking is free.
What that means is that people that pay charges for exceeding their overdraft limit or bounced cheques subsidise the rest of us. The OFT estimates that UK banks collectively receive up to £3.5bn a year in penalty fees - the equivalent of around £10m a day.
The banks have posted big profits in recent years - the top five UK banks made almost £4bn in the first half of 2007 alone. And over the past six years, Lloyds TSB has raked in £1.932bn in income from bank charges alone. If the banks lose the case they will be looking to recoup their losses - and experts predict this could be in the form of a monthly fee or fee-per-transaction.
What about the rest of the world?
Paying for banking is commonplace in other parts of the world. In the US and Australia, most banks give customers a certain number of free transactions and then they pay for any additional ones.
Kevin Mountford of price comparison website moneysupermarket.com says that at the moment free banking is possible largely because of the number of people who are hit with fees and charges. "The OFT's clampdown on this could well be moving us closer to a pay-per-transaction system - but one that Britons will resist," he says.
"We have already seen some providers abandon the concept of free banking by steadily enforcing charges on their less profitable customers. HSBC and First Direct both introduced a £10 monthly fee on certain accounts and HSBC's non-Premier account holders at its Canford Cliffs branch in Dorset are paying a fee for counter services."
Is it too late to reclaim my bank charges?
Consumer groups are still urging banking customers to make claims against their bank if they are unhappy with the charges.
However, banks will not process complaints at this stage because they are still covered by a "waiver" granted to them by the FSA back in July when the test case was announced. This means they do not have to make progress with any new or unresolved complaints about their charges until the outcome of the test case. The case will then be looked at in light of the result.
But it's still worth filing your claim now - that way your details will already be on the banks' systems should they lose the legal action and be forced to pay out.
