Banks back in court
Britain’s biggest banks are back in court today to challenge an earlier ruling that gave the Office of Fair Trading (OFT) the right to decide whether overdraft charges are fair or not.
Back in April, the High Court ruled in favour of the OFT with the judge, Mr Justice Andrew Smith, declaring the organisation does have the power to apply consumer contract regulations to decide on the fairness of bank overdraft charges. However, the seven banks and one building society involved in the test case appealed this decision, leaving customers in the process of reclaiming unfair charges in limbo.
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. This waiver was recently extended until 2009.
The appeal returns to the High Court today (Tuesday 28 October) but it may be some time before a conclusion is reached. Even if the Court does again decide in favour of the OFT, then further appeals could be forthcoming - meaning people who have been hit by huge fees face a long wait before they have any hope of getting their money back.
Peter Vicary-Smith, chief executive of Which?, criticises banks for pursuing the issue, especially considering the current financial climate.
"It's extremely disappointing that instead of looking for ways to make their customers' lives easier during these difficult times, the banks are piling on the misery by continuing to hit them with unfairly high unauthorised overdraft fees,” he adds. “The banks should not be appealing the High Court's decision. They should be working with the OFT to establish what constitutes a fair unauthorised overdraft charge and starting the process of refunding the customers they have been overcharging for years."
If the banks do drop their appeal, and the OFT finally gets the right to set out a fair level for overdraft fees, then experts expect it will insist banks lower their charges.
However, the concern is that banks will respond by putting up charges elsewhere - potentially ending free banking in the UK.
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.
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.