Overdraft charges battle goes to the Lords
Victims of bank charges may find out if they can claim back their money this week, as the long-running test case into overdraft charges is heard by the House of Lords.
The legal dispute, which has been rumbling on for nearly two years, affects around one million people who are waiting to see if they can reclaim their charges. The Office of Fair Trading (OFT) first brought the test case against seven banks and one building society to the High Court in 2007 – it believes that it should have the right to apply consumer contract regulations to bank charges and decide whether they are too high or not.
Although both the High Court and the Court of Appeal have found in favour of the OFT, in April this year the banks involved were given the right to take their case to the House of Lords.
A House of Lords hearing could potentially drag on until 2011, and the European Commission could even become involved at some point. The Financial Services Authority (FSA) has put a waiver in place removing the obligation of banks to deal with complaints and refund requests surrounding unauthorised bank charges until a final decision was reached. This is currently due to expire in July 2009, but could be extended until the House of Lords comes back with its verdict.
Peter Vicary-Smith, chief executive of Which?, says: “It's disappointing that nearly two years since this saga began, little has changed for the millions of consumers being hit with these charges.”
What can you do
The waiver put in place by the FSA means that people in dispute over overdraft charges have little hope of getting their money back in the immediate future - all pending cases with the Financial Ombudsman Service are on hold.
However, individuals are still able to lodge a complaint for free. Doing this now means your case will be nearer the top of the pile once the waiver is removed.
In addition, if you are struggling financially you may be able to have your claim fast-tracked under the terms of the waiver, says Vicary-Smith. The FSA has told the banks that they must process claims where a customer is suffering genuine financial hardship – this is defined as someone who is unable to pay for reasonable living expenses, such as rent, bills and council tax, as well as meet their financial commitments such as loans.
Vicary-Smith adds that this rule applies for existing as well as new claims, so if you have made a claim in the past and now find yourself struggling financially, you can ask your banks or the Ombudsman to fast-track your case.
The case for capping overdraft charges
The OFT is fighting to be given the right to decide whether overdraft charges are too high; if it is sucessful, it may well decide to cap these as if sees fit.
Its research suggests that banks are hitting customers with unfair penalties. The cost banks incur when a customer goes overdrawn without permission are thought to be as low as £2.50, yet the charges passed on to customers have been as high as £38.
In April this year, the OFT announced it will focus on just three banks - Lloyds TSB, HSBC and Clydesdale - in its ongoing investigation into the fairness of overdraft fees. It says these three firms provide the best representative selection of all unarranged overdraft charging terms, and the outcome will therefore be relevant to the assessment of other banks' terms.
The case against capping overdraft charges
The banks involved in the test case say that charges are fair. If they back down and accept defeat, then the chances are they will be forced to cap their charges potentially at around £10 by the OFT.
However, it is estimated the banks earn up to £3.5 billion a year from penalty charges - if they lose this income stream, they may will look to other areas to recoup the loss. Earlier in 2008, HSBC said it expected to pay back a further £300 million if the OFT decision went against it.
Derek French, director of the Campaign for Community Banking, says: “Banks have been dropping hints for quite some time that, if the public wins on the penalty charges, then the downside of that is that charges for all may return.”
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.
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.
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.