Banks squeeze overdraft fees
As Britain’s biggest banks return to court to defend overdraft fees, new research reveals average interest charges on overdrafts have increased to over 13% since June.
Seven banks and Nationwide Building Society yesterday launched a legal appeal against a ruling by the High Court earlier in the year that gave the Office of Fair Trading (OFT) the right to decide if overdraft charges are too high.
Yesterday, the banks argued that the decision was wrong, and that allowing the OFT to intervene in bank charges could have “serious consequences”. There is concern that should the OFT succeed in its legal battle over overdraft charges, then free banking in the UK could be at risk.
The signs suggest that banks are continuing to squeeze customers despite the court case. Research from price comparison website MoneyExpert.com reveals banks have reduced the penalties levied at people who go overdrawn without permission but have increased charges on authourised overdrafts.
It found that the average authorised overdraft charge is now 13.06% compared with 11.71% in June. The average unauthorised overdraft charge, meanwhile, has fallen from 20.93% in June to 19.85% today.
Sean Gardner, director, MoneyExpert.com, says the figures indicate the shape of things to come.
“The Bank of England may have cut rates with the likelihood of bigger cuts to come but customers using their agreed overdrafts are not feeling any benefit,” he adds.
Some of the best and worst authorised overdrafts:
|Current Account||Authorised overraft rate|
|Bank of Scotland|
Ultimate Reward Account
Current Account Plus
Premier Life Account
Premier Current Account
|Source: MoneyExpert 29/10/08|
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.
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.