Banks in court over "unfair" overdraft charges
Some of the high street’s largest banks are being taken to court accused of hitting their customers with unfair overdraft fees.
The Office of Fair Trading has legally challenged the fees banks and building societies charge their customers who go into the red after it received thousands of complaints from current account customers. The case is brought against HSBC, Abbey, Barclays, Halifax, Lloyds TSB, Nationwide, RBS and Clydesdale Bank, which collectively account for 90% of UK current accounts.
The OFT believes that the banks are acting unfairly and has asked the High Court to rule whether, as a regulator, it has the power to stop them issuing these fines.
If the court decides in its favour, then the OFT is likely to demand banks not only reduce their penalty charges but also refund customers who have already been hit with fines.
Many banks charge customers around £30 for exceeding their limit, but campaigners say it only costs them around £2.50 in administration costs.
So far, thousands of consumers have already claimed back unfair overdraft charges amounting to nearly £500 million. According to the OFT, banks collectively bring in £3.5 billion in unauthorised overdraft fees each year.
All complaints relating to overdraft fees have been put on hold until the court reaches a decision on the legality of unauthorised overdraft fees. Although the hearing is expected to last around three weeks consumers may have to wait until April for a final decision.
And even if the High Court rules in the OFT’s favour, more legal action could be on the cards. The regulator is currently conducting an investigation on the true cost of unauthorised overdraft usage to banks to determine what a fair charge would be.
If it decides charges must be reduced but is unable to reach an agreement with banks, then it will have to return to court in order to enforce any action.
According to the Consumer Action Group banks make 2000% profit from customer penalties.
But the British Bankers’ Association insists the charges are legal, fair and transparent. It says that even if the OFT is successful in this legal challenge, its members are unlikely to accept the charges are unfair.
There are also fears that if banks are forced to stop charging such high unauthorised overdraft fees then they may attempt to claw back the money by increasing costs to consumers elsewhere.
Phil Jones, personal finance campaigner at Which?, says: “Banks have a track history of finding other revenue streams and we will continue to scrutinise this. Customers should also shop around to make sure they get a good deal.”
Which? is also advising consumers who think they have been unfairly charged by their bank to keep on complaining even though it may be some time before they see their money.
Jones says: “This could be the start of the end for overdraft fees and we believe the OFT has a good chance of winning.”
Click here to read our guide on how to avoid overdraft charges.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.