Banks win overdraft charges case

Scales of justice

Millions of bank customers hoping to get their overdraft charges refunded have been dealt a hefty blow as the Supreme Court decided to rule in the favour of the banks.

The shock decision to rule in favour of the banks over unauthorised overdraft charges follows over two and half years of test litigation.

The court overturned two earlier rulings, allowing the Office of Fair Trading (OFT) to investigate the fairness of the fees levied on people who accidentally stray into the red on their overdraft.

An estimated 12 million people have been hit with fees of up to £39 each time their accounts veered into unauthorised territory. Critics claimed the actual cost of the administration is just £4 - and the rest is pure profit.

The banks earn around £2.6 billion a year in revenue from these charges.

However, Supreme Court president Lord Phillips has turned previous legal rulings on their head, stating that unauthorised overdraft charges are an important part of current account services, which the banks provide to their customers and that the amount of those charges is not assessable for fairness.

The judgement will dash the hopes of the 1.2 million people who still have claims on hold. They now stand to lose around £634 each - as this is the average outstanding claim according to Which?.

Banks had paid out around £560 million in refunds before the process was frozen in 2007 pending the outcome of the test case. It is currently unclear as to what will happen to the refund claims on hold.

An ongoing fight

Despite the unexpected decision, the ruling is not necessarily the end of the battle. Lord Phillips said that the OFT could still use other regulations to scrutinise bank charges.

"This will not close the door on the OFT's investigations and may well not resolve the myriad cases that are currently stayed [put on hold] in which customers have challenged the relevant charges," he told the court. 

However, the OFT will not be able to challenge the decision in an appeal to the European Court of Justice. 

Kevin Mountford, head of banking at, says: "We expect the OFT to continue to try and press for a system where the costs of running the current account system are spread more fairly across all customers.

"In truth, banks have already started to respond to this - for example we've already seen a big move from banks towards so-called packaged accounts where you pay a monthly fee but get added benefits such as travel insurance thrown in. We expect this trend to continue and in return for fairer overdraft charges banks could introduce transaction fees, or monthly and annual fees."

In response to the court case, banks and building societies have attempted to simplify their charging structures over the past year and many have adjusted their unauthorised overdraft fees. 

However, from 2008 to 2009, only two of the top eight banks - Halifax and Barclays - significantly altered their charging structure.

Fears for the future

Concerns remain that the decision now gives banks the green light to charge what they like in unauthorised overdraft fees and other banking charges.

Peter Vicary-Smith, chief executive of Which?, is deeply disappointed with the outcome. He says: "Not only does it give banks licence to charge what they like for unauthorised overdrafts, but it could have ramifications for other areas of personal finance. The banks now have no excuse for introducing other fee charges."

Reports have suggested that banks could introduce a monthly fee for each of the 54 million active currents accounts in the UK - and many people have more than one account - or more complex tariffs based on a charge per entry or cash withdrawal. A charge of £2.50 a month would generate £1.62 billion a year but would also be a heavy blow for those who have never gone overdrawn.

Another option could be charging for the UK’s 39,000 free-to-use cash machines or levying fees on cheque payments or money transfers.

However, the end of traditional ‘free banking’ could also lead to more innovative products making their mark on the current account market. Last week, Santander introduced its Zero current account, which has no overdraft fees and is free from charges for bounced payments and overseas cash withdrawals. 

However, the catch is that it’s only available to homeowners who have a mortgage with the bank or subsidiaries Alliance & Leicester and Bradford & Bingley.

David Black, banking specialist at Defaqto, says it’s important for people to shop around for a current account.

"Currently only about 6% of people switch their current account every year. People should wake up to the fact that they don’t have to stay with the same current account and should not be afraid to switch to get a better deal.

"While accepting that overdraft availability is always subject to status there are some cracking deals. Abbey, Alliance & Leicester and Barclays all offer a 0% authorised overdraft for a year. In the case of both Abbey and Barclays you must switch your account from another provider and deposit at least £1,000 every month. Alliance & Leicester require you to deposit at least £500 each month.

"Cahoot has a £100 interest-free overdraft and an authorised overdraft rate of 11.8% APR on balances up to £1,000.

"If you can deposit at least £1,500 every month, Norwich & Peterborough Building Society’s authorised overdraft rate is 11.74% EAR," he adds.

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