How to avoid unfair overdraft fees
The Office of Fair Trading and some of the biggest banks on the high street are in court fighting out the issue of unauthorised overdraft fees.
Banks currently charge their customers around £30 for going into the red without permission, but many campaigners claim the administration costs are as little as £2.50. According to the OFT, banks collectively bring in £3.5 billion in unauthorised overdraft fees each year.
But it believes these charges are unfair and is using this legal challenge as the first step to outlawing them.
The High Court is currently hearing the case, which is expected to last several weeks with a judgement issued around April. But a final resolution to the matter may take years so until then there are several things you can do to protect yourself from being hit with overdraft penalties.
Why has this issue gone to the High Court?
Although banks have already paid out £500 million to customers unfairly charged for using their overdrafts, these cases were clogging up the small claims courts. The OFT brought the High Court case not to establish whether overdraft fees are legal or not but rather to find out whether it is within its remit to either enforce a cap on fees or introduce a standard charge across the board.
The banks involved believe they can legally penalise customers in this way, so it is in their interests for the issue to be investigated at a higher level.
What happens if the OFT wins this case?
If the High Court rules that overdraft charges come under the scope of the 1999 Unfair Terms in Consumer Contracts Regulations then this would give the OFT the authority to decide if the charges are unfair.
The OFT is currently investigating what is a fair charge to customers who exceed their overdraft limit. If it decides that banks are charging too much then it will take another court case to enable the OFT to bring its decision into practice.
The side that losses the current court case is highly likely to appeal, and the issue could even be referred to the House of Lords.
Is it still worth trying to reclaim your bank charges?
The Financial Services Authority and the Financial Ombudsman Service have agreed to postpone any claims until the end of the case, which means all refund applications are on hold pending the outcome of the court case.
But this could take years. This court case is not enough to force banks to stop charging overdraft penalties, so the issue is far from being resolved.
Having said that, if your circumstances are exceptional, or if your bank was at fault, you could try your luck by making a direct appeal to it for a refund. A template letter is available from www.which.co.uk.
If your appeal is rejected and you are unhappy with the decision, you can let your bank know and they will keep your complaint on record until the legal dispute is resolved. The Financial Ombudsman Service will not longer accept complaints about this issue, but they can help you find out the best person at your bank to get in touch with.
What else can be done?
Unauthorised overdraft charges are issued when you exceed your account’s limit. A simple way to avoid being hit with these is not to go overdrawn. That's easier said than done, but here are a few pointers to stop you from going into the red.
1. Review your bank account. Different banks have different policies on overdraft usage and charge different fees. To find out what the banks are charging, read our round-up of overdraft fees.
2. Check your bank balance regularly. If you have online banking then set aside some time each week to log-on and check your balance. If you see you are close to exceeding your limit, then cut back on your spending until payday or more funds become available.
Even if you don’t bank online, most banks offer telephone services that allow you to find out your balance simply and quickly.
3. Review your direct debits. One of the most common causes for people going overdrawn is badly timed direct debits – for example, your mobile phone bill coming out just before payday. One way to avoid this scenario is to set up direct debit payments for as soon after payday as you can, while there is still plenty of cash in your account. If you can’t move a direct debit then make sure you have enough money to pay it without going overdrawn.
4. Set up a savings account. If you are in danger of going overdrawn then transferring some money from your savings account is a good way to avoid being hit with a charge from your bank. But make sure you replace the money in your higher interest savings account as soon as you can.
5. Set up an agreed overdraft. Although you may still have to pay for an agreed overdraft the chances are it will cost you less than an unagreed one. Talk to your bank about whether it offers this facility and if it is the right option for you.
6. Budget. Living within your means doesn’t mean denying yourself. By working out where your money goes you can start to identify unnecessary costs, and eventually cut them out of the equation. All you need is a copy of your bank statement and a highlighter pen. Reviewing your monthly statements also reveals the times of the month when you are most at risk of going into the red.
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.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.