Overdraft charges battle goes to the Lords

Westminster Abbey

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.”