This piece first appeared in Saga Magazine in July 2007
The text here may not be identical to the published text

Banks brought to account

Judges, customers and the competition authorities are all turning up the pressure on the banks over the charges they make to customers on their current accounts.

The Office of Fair Trading (OFT) has launched a formal investigation into the penalty charges on current accounts when customers go overdrawn without permission. The investigation replaces an enquiry announced last year and gives the OFT tough powers to force the banks to produce factual justifications for charging up to £35 for informing a customer that they are overdrawn. At the same time the OFT has launched an in-depth study into all the costs of what it refers to as ‘so-called’ free banking.

Many people worry that if the banks are forced to slash their penalty charges they will make all customers pay for banking services we currently get free. OFT Chief Executive John Fingleton admits that one outcome of his enquiry might be "that people pay a fee every year for their bank account and that’s upfront, but the default charges are low or non-existent."

But he says that if people believe their banking is currently free they are wrong.

"We don’t have free banking at the moment. It’s mostly the banks who say we have free banking and it’s a myth. In fact it’s completely dishonest to consumers to say that banking is free because people are paying a lot of money for their banking service."

Fingleton points out that customers earn almost no interest on the balance in their current account and that is a hidden charge. The big five High Street banks pay a standard 0.1% on balances held in most current accounts. If you keep an average balance of £1000 in it you will earn just £1 over twelve months – and that is before 20p tax is deducted. Compare that with the money earned by the bank lending this money out overnight and earning – at the time of writing – 5.33% or £53.30 over the year. That £52.30 difference between what the bank earns on our money and what it pays us is a hidden charge. Other costs are more subtle. When a bank lends us money it typically charges us 15 per cent. But when we lend it money – by putting cash into our savings accounts – it pays us a maximum of 5 per cent or so and the average is far less. The difference between those two rates is another hidden cost of banking.

But to many customers banking in the UK does seem free. There are no charges for arranging or cancelling direct debits or standing orders, no charges for writing a cheque or paying one in, no charges for withdrawing money from a bank cash machine or over the counter in the UK, and no charges for running the account and sending out statements. People who manage their accounts well, never go overdrawn, keep the balance low, and do not use their cards abroad will be very aggrieved if the OFT study results in them paying a fee to run their bank account while people who go overdrawn see their costs come down. The OFT has said it will report by the end of the year.

Customers in court
Meanwhile banks are paying up as thousands of customers reclaim penalty charges which they claim are illegal. One of the most spectacular recoveries was the £35,987.94 refunded in April by NatWest to a Norfolk businessman who wants to remain anonymous.

Because the banks are paying up until recently no court had heard the arguments and no judge had ruled on whether these penalties are legal or not. As we reported here last year (Saga Magazine December 2006) penalty charges on current accounts can amount to £30 for each bounced payment and £35 a day for an unauthorised overdraft. And interest is then charged on those penalties at rates up to 30 per cent. The banks say these charges are avoidable and in the terms and conditions. Lawyers say that they are illegal under the Unfair Terms in Consumer Contracts Regulations 1999. These rules recognise that a business and a customer are unequal when it comes to agreeing a contract. Any term in a contract that is unfair to the customer can be unlawful. In particular if the customer breaks the contract – by going overdrawn without permission – the bank is entitled to recover any extra costs it incurs. So if it bounces a payment or writes a letter the bank can only charge the cost of doing so, not add a penalty on as well.

The banks say they have legal advice which confirms their charges are fair and legal. But they will not publish that advice and no bank has had the confidence to test it in court. One spectacular failure of nerve occurred on 26 April. The Mercantile Court in Leeds was due to hear 77 claims for refunds ranging from £100 to £12,000. But all were quickly settled after Judge Roger Kay suggested the banks might like to let one test case go forward and pay the claimant’s costs as well as their own. A few weeks earlier Judge Andrew Kearney sitting in Bristol was so annoyed with Lloyds TSB that he took the highly unusual step of ordering it to pay costs of £85.41 to customer Vivien Lloyd on top of her refund of £655 in penalties. The judge said the bank was ‘acting unreasonably’ after it allowed the case to proceed to court but then settled as the hearing opened.

However, one judge has found for the banks. The surprise judgement came by accident after Lloyds TSB appeared to lose track of a claim by a customer, Kevin Berwick, for £2545 in penalty charges and interest after he went overdrawn without agreement. Although the bank failed to offer him money before the case and failed to appear at the court His Honour Judge Cooke rejected Mr Berwick’s claim. He said that the contract with the bank – which he had not seen – did not prohibit anyone going overdrawn without permission. When Mr Cooke went overdrawn it was not, therefore, a breach of contract. It was a service and the bank could charge what it chose. Lawyers are sceptical and the case will go to appeal. Campaigners say the case, which is not binding on other courts, should not put people off claiming back penalty charges.

A small chink in the banks’ unified stance was glimpsed earlier this year when Alliance & Leicester came close to admitting its penalty charges were too high. A customer, who wishes to remain anonymous, had claimed a refund of £2035 in penalty charges which at Alliance & Leicester are £25 for going overdrawn without permission and another £25 for each payment bounced. But in a letter sent in January the bank said "A recent report commissioned by the BBC claimed the cost would be no more than £4.50" and offered to recalculate the charges at that price and refund the difference of £1558.

That research was done for the Money Programme shown on BBC1 on 12 December 2006. It brought together Philip Molyneux, Professor of Banking and Finance at the University of Wales, Professor John Struthers of the Paisley Business School and Ian Jarritt, who used to be a senior executive at NatWest responsible for the branch network and commercial banking in the Channel Islands. They estimated that the highest cost for bouncing a cheque that could be justified was £4.50, while stopping a direct debit or dealing with an unauthorised overdraft could cost no more than £2.50. A similar study, done by a former employee of Yorkshire Bank, put the cost even lower at £2. The average amount charged by the banks is £30.

What to do
If you have been charged a penalty on your current account in the last six years consider reclaiming it. Which? estimates that 85% of people are successful. Two consumer websites www.consumeractiongroup.co.uk and www.penaltycharges.co.uk claim that more than £13.5 million has been recovered by their users. The bank has to provide you with copy statements for a maximum total fee of £10. Then follow the advice and use the standard letters at these websites or www.moneysavingexpert.com (more than a million copies of its reclaim letter have been downloaded) and ask for a refund. Don’t take no for an answer. If you still get nowhere complain to the Financial Ombudsman Service which is free. Or go to the small claims court which is also free. Never use a claims handling company which will charge you up to 40% of anything they recover. Open another bank account before you start in case your bank decides to close your account.

Further information
Money Programme: news.bbc.co.uk/1/hi/business/6169539.stm
Tom Brennan: www.tombrennan.co.uk
Financial Ombudsman Service: www.financial-ombudsman.org.uk
Which?: www.which.co.uk

July 2007