Banks postpone refunds for bank charge victims
Banks have appealed a High Court ruling that gave the Office of Fair Trading the right to cap overdraft fees - meaning any resolution for victims of unfair bank charges looks a long way off.
On 9 May, the High Court ruled that the Office of Fair Trading (OFT) had the right to decide whether bank overdraft charges are fair or not. The judge, Mr Justice Andrew Smith, ruled that charges on unauthorised overdraft usage are subject to the Unfair Terms in Consumer Contract regulations. This effectively gave the OFT the right to cap charges.
However, the judge's other ruling - that banks' current terms and conditions are “plain and intelligible” - paved the way for an appeal.
And the stakes are high. Banks are estimated to earn around £3.5 billion a year from fees on unauthorised overdrafts.
The legal battle resulting from the appeal could continue for more than a year - meaning people who have been hit by huge fees will face a long wait before they get their money back.
The case will be passed to the Appeals Court and is likely to be heard before the end of 2008. However, if any side launches further appeals the case could be referred to the House of Lords before a final decision is reached.
David Black, banking expert at data provider Defaqto, says the European Commission could even be involved at some point: “The stakes for both sides are extremely high so this has all the hallmarks of
being a very lengthy judicial process. Next step is the Court of Appeal and after that the House of Lords and maybe even Europe.”
The OFT is currently investigating what a fair overdraft fee should be. However, the judge involved in the case has indicated he is keen it reaches a conclusion sooner rather than later.
It has now suggested it will report the findings of its investigation during the second week of July 2008.
Impact for customers
At the end of 2007, the Financial Services Authority (FSA) put a waiver in place that removes the obligation of banks to deal with complaints and refund requests surrounding unauthorised bank charges until a final decision is reached.
Which? says that for every year the issue remains unresolved, customers will pay £3.6 billion in new overdraft charges.
A spokesman for Which?, which has campaigned against high overdraft fees, says: "[We are] frustrated that the banks didn't just throw in the towel back [in] April and start working with the OFT on establishing what fair charges are."
If the OFT is eventually given the legal right to impose caps on charges then experts warn the current account market will “change significantly”.
Black says: “Limited facility basic bank accounts, which do not have overdraft facilities, will almost certainly remain free but it looks increasingly likely that charges will eventually be introduced for full service current account customers.
“These may take the form of either pay per transaction or a flat fee with or without discounts for taking other products from the bank or maintaining a specified minimum balance.”
None of the seven banks or Natonwide Building Society involved in the case or the OFT were able to comment on the appeal for legal reasons.
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.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
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.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.