Thousands of bank customers are using the law to recover penalty charges imposed by the banks when they have gone overdrawn without permission or missed a credit card payment.
For years the banks have made big profits by fining customers who make mistakes like these. The fines the banks call them charges are what we pay when we break the rules of our account. On a credit card that might be missing the deadline for the monthly payment or exceeding the credit limit the bank has set. On a current account it might be not having enough money in the account to meet a direct debit payment or cheque. The penalties for breaking the rules on a current account can add up to more than £100 for a single mistake in balancing the money coming in and going out. Consumer organisation Which? estimates the banks rake in £4.7 billion a year from us in penalties.
Illegal
Recently it has become clear that many of these fines are illegal. For a
long while this point of view was held by a small group of vociferous critics of
the banks. But it was given respectability in April this year when the Office of
Fair Trading stepped in and demanded changes. It looked at the £20 or £25 fines
imposed by credit card providers when we exceeded our credit limit or were late
with a monthly payment. The OFT report made it clear that to be legal these
penalties could only reflect the banks costs when we breached the rules. In
other words they could not charge us £25 if in fact it only cost them £5 to send
out a letter or stop a payment. The law the banks risk breaking are the Unfair
Terms in Consumer Contracts Regulations 1999. They say that a company cannot
make a customer who breaks the contract terms "pay a
disproportionately high sum in compensation." In other words the charge made
for breaking the contract can only reflect the cost of the breach of the rules
and cannot have a fine or penalty added on as well.
The OFT did not say what the actual cost was and the banks have never revealed that information. Instead, it warned that if any credit card provider charged more than £12 for a breach of the rules then it might launch a specific investigation into that banks costs and make a formal ruling on what it should charge.
Alarm bells rang at the banks. The last thing they wanted was the OFT using its powers to burrow away in their books and discover the real cost of their computers generating a letter which is printed, enveloped, addressed and posted automatically. While protesting that their present charges were not too high and were legal all of them decided to reduce credit card penalties to around the level at which the OFT would not investigate £12. So even though the OFT said "we are not inviting the banks to align their charges at such a threshold figure" that is just what they did.
Overdrawn
Now the OFT is turning its attention to current accounts and the penalties
the banks charge for going overdrawn or bouncing a payment. The same law applies
and the OFT is investigating if banks are charging us more than our mistake
actually costs them. The charges can be very high. Fairly typical is Lloyds TSB
which has just toughened up the penalties for customers of its popular Classic
current account. If they go a penny overdrawn without permission, the bank now
charges £30 for each day overdrawn capped at £90 a month. And if the bank
decides to bounce a direct debit or cheque it charges £35 a time with a maximum
of £105 a day. Interest is then charged on the unauthorised debt now boosted
by the penalties at 29.8%.
Some banks charge more than this for going overdrawn or bouncing a payment and do not have caps on the amount of fines that can levied in a day or a month. So if you arrange for your payments to go out at a similar time in the month when your pay or pension is paid and the money coming in is late for some reason you can rack up huge charges as each payment is bounced. And then all banks whack us again with interest rates that are practically usurious.
It is not just the feckless and careless who go overdrawn. It can happen to anyone and often does. If you go on holiday it can be difficult to keep an eye on what is going in and out of your account especially if you are using your debit card abroad. If you are taken ill, or have to visit a family member who is, then you may have more pressing things on your mind than the exact state of your bank account. Sometimes a regular payment into your account is late or wrong, leaving you struggling to meet those regular bills. Or you may transfer money into your current account from your savings, only to be caught out by the many days the banks take to do this simple task. Once you have gone overdrawn, the penalties can make struggling back into the black very difficult turning a small problem into a major one.
Take action
If some charges really are illegal how do the banks get away with it?
Breaking the consumer contracts regulations is not a crime. You cannot call the
police and ask them to arrest your bank manager. It is a civil matter between
the customer and the bank. So it is up to us, as bank customers, to challenge
these amounts and demand back the money we should never have been charged in the
first place.
That is just what a growing number of customers is doing. And in almost every case the banks are paying up without letting the law be tested in court or ruled on by the Financial Ombudsman Service. If you have suffered charges you consider unfair, write to the bank, apologise, and, as a loyal customer, ask for a refund of the charges. In some cases the bank will do that and offer an overdraft facility to keep you the right side of the rules.
If that does not work, or if you have been charged penalties in the past, you can go further and demand them back for up to six years so excessive credit card penalties are in the frame too (remember the current £12 penalty may still be more than it costs the bank). If you do not have all your statements, write to the bank asking for details of the charges it has made. It has to provide them within 40 days and cannot charge you more than £10.
Use that information to write again asking for a refund of all the charges. Point out that in your view they exceed the cost to the bank of the way you have conducted your account and so are not allowed under the Unfair Terms in Consumer Contracts Regulations 1999 Schedule 2(1e). At this stage many banks will pay up some or even all of the charges.
If the bank refuses, or makes an inadequate offer, you have two choices. You can go to the Financial Ombudsman Service which is free and which will often resolve the issue, though it may take some months to do so. Or you can write again to the bank threatening to go to the small claims court to recover the costs. At this stage you should take advice from one of the free websites that help with this process. There is no need to pay anyone for that help you can do it all yourself at little or no cost. There will be a small court fee. If you win it will be paid by the bank. If the bank makes you an offer before the case is heard make sure that includes paying the court fee. If you do pursue court action your bank may decide to close your account. It is sensible to have another account already opened in case that happens and make sure you can pay off any outstanding overdraft.
The Office of Fair Trading is expected to rule on bank charges in 2007.
Advice and draft letters to reclaim charges
www.which.co.uk
www.bankcharges.info
Campaigning groups
www.consumeractiongroup.co.uk/bag.php
www.bankchargeshell.co.uk
December 2006