Banks win overdraft charges case
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 moneysupermarket.com, 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.
A current account that charges a monthly fee in return for a “package” of additional services, such as travel insurance, credit card protection, mobile phone insurance, identity theft insurance, car breakdown cover or a “concierge service” that will book airline and theatre tickets or restaurant tables. However, many consumer experts say the features are overpriced and that more competitive deals exist elsewhere in the market and that very few packaged account holders actually take advantage of the features.
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.
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.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.
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.