Sky News business presenter Emma Crosby

Consumer finance groups say they can smell victory in the air at the High Court today.

A test case between the Office of Fair Trading and many of the UK’s leading high street banks has found that, under current legislation, charges levied by banks for unauthorised overdrafts ARE subject to OFT regulation.

That means the OFT can now pursue another hearing where the High Court will decide if these unpopular bank charges are unfair.

I am one of millions of people across the country who’ve had that nasty letter from the bank informing me that I have slipped over my overdraft limit by a couple of pounds and so now they “regret” to inform me I’m going to have my knuckles rapped with a twenty quid fine. I’m told that banks are the only institutions in the country who can take money from our accounts without asking and so off the money slips never to be seen again.

It’s estimated these fines can be as much as £35 a pop but cost the banks as little as £2.50, so high street lenders are making as much as £3.5 billion a year from penalty charges.

It’s no wonder that customers are fighting back. And if the first step has been taken today this could cost the banks a fortune. £3.5 billion times 6 years (the number of years claims can be backdated) plus lost interest charges and legal fees means they could be looking at a collective sum of  well over £20 billion pounds. That’s almost credit crunch proportions.

But could this be a hollow victory? There’s no such thing as a free lunch and our lovely lenders will want to get their money back some how. How about the end of free banking? That’s what the banking associations are warning. 

Would you be happy spending say £20 a month to have a bank account? Aren’t you now paying for the mistakes of those who haven’t managed their money properly? And for those who complain that the interest rates on current accounts are so miserably small, that’s payment enough then surely if you’re wanting to save money you don’t leave it in your day to day bank account but stick it in a high interest account or cash ISA.

The real winners? You guessed it. The lawyers.  Our business correspondent Joel Hills tells me some of the barristers in this case are charging £1000 an hour. Let’s hope the banks have a large overdraft.

Let us know what you think.

Comments

[Khalid 27 Apr 2008 19:34:50]

Sir
Thus far as any element of banking, this case has shown signs not to dissimilar to the real world of banking, ie that when it comes to financial matters, nothing is straight forward, hence the second hearing.
Whilst the foundations have been set thus far as the viability of the acclaimed service charge, then that argument has now long last been formally resolved.
The next step, the one I'm sure everyone is waiting for is how much is a reasonable cost to provide such account services?
We have indeed blogged about the process elements surrounding the many a heartfelt letter from the bank, whilst at the same time rehearssed the argument surrounding the amounts overdrawn by as the case may be.
Whilst banks adopt many a LIBOR rate, dependant upon the amount overdrawn, naturally service charges should reflect the level of service, whilst a penalty speaks for its self.
So, if "Free Banking" which isn't free anyway, is to remain, then 2 choices spring to mind.
(1) Arrange an agreemnt before going overdrawn
(2) Rather than have a fixed penalty sum for such account activity, why not let Banks charge interest at the base rate for each day the account remains out of control?
Other than that, [California Dreaming-DJ Sammy] as the credit file awaits.

[Mr C,G,Williams 27 Apr 2008 07:48:52]

it raises the case that the teachers should not get the pay rise demanded because they have not educated these people to count properly and keep their spending according to the money they have,as the government got us all to pay pensions etc direct into bank accounts i hope they put the pension up to cover bank charges should they come,but the charge surely is a fine for going overdrawn,the acual cost has no bearing on the charge,i don`t suppose it cost £60 to send out a speeding fine,if another £30 a year was put on the road fund licence it would save the unfairness of only the people who exceed the speed limit paying the fine,let them who abuse the system payup and stop whinging,

[iain gardner 26 Apr 2008 17:54:04]

the bank that my wife and I use, Lloyds TSB, charge £15 when the account is overdrwn and then £10 a day until the account is brought upto date. In our experiance it takes 6 days to get this letter therfore you alredy have a cost £75. When we asked to extend our overdraft they couldn't do this but could charge us these costs!

[Clive, Huddersfield 26 Apr 2008 10:17:58]

Banks should NOT be allowed to charge for current accounts. They are in an effective cartel. They make money on current accounts by the totally unjustifiable 3 days (and minimum 5 days for B/soc) money transfers. They also make lots of money on current account balances and pay little or nothing for these. They should cut staff numbers and wages and general costs, by so doing becoming more efficient.

[IW 26 Apr 2008 05:34:31]

Why do some people fail to get the point... maybe self interest blinding them to the facts?

The argument that its peoples fault for going overdrawn is fine, and they should pay the cost that incurs - not be milked to exhorbitant and illegal levels.
That's what the claims are about.

If you believe that its these charges that permit "free" banking; then if people got it right all the time there'd be nobody to subsidise the self righteous fools who miss the point.

Simply - the banks charges are disproportionate to the cost incurred and therefore illegal.

The fact the banks process transactions in such a way as to make people incur these charges (they could simply reject them) so as to be able to profiteer from them is also immoral and probably means the banks should be held responsible for part of the costs incurred (contributary negligence).

I can see the system suddenly preventing people going past their overdraft limits once this is all resolved - a positive step all round.

[susan Blackburn Lancashire 25 Apr 2008 16:50:06]

My neice Catherine got her self in a bit of a mess missing 3 direct debit when the bank charged her £35.00 per letter which put her in a greater mess having £105.00 taken from her bank it was a downward stuggle trying her best to meet her bills this got worse the month after because of the bank charges she again didnt have enough in her account and again she was charged she ended up actually missing her mortgage she works full time with no chance of overtime at work life got worse she now in the middle of her house being reproceesed and all this started with bank charges it's an absolute disgrace what this country is coming to

[Mike, Luton 25 Apr 2008 12:24:35]

Since 1972 when I started work, I have never paid a penny in bank charges - why?, I have a brain and don't go overdrawn. Simple stuff really you keep a record of your debits & credits and your balance - it ain't rocket science. Take responsibility for your own actions. Congrats to the those who don't do this as they may well have signalled the end of free banking for us all -

[Max, The Lakes 25 Apr 2008 11:18:30]

Regaring the end of "free" banking, if the banks decide that despite the money they generate from our funds, that they now have to charge us for teh privilege, then we need the choice of having our salaries paid in cash or to be sent to some other institution,not a bank. That way we get some chance of applying market forces ....

[matthew martin in vietnam 25 Apr 2008 11:02:37]

Banking is a service industry that charges for its services ... just like any other service industry. Automatic recovery of these service charges are the most cost efficient way of collecting them. Would customers prefer to receive a polite, signed letter, asking them to deposit cash to cover? If they do want this service, it would cost MORE money. UK watchdogs have already made banking more expensive through some of their actions, despite their originally good intentions. It's now gone too far.

[IW 24 Apr 2008 20:22:21]

..of course the banks need to argue they believe the charges are fair...

Anything else would be admitting they knowingly acted illegally and committed theft on a grand scale.

[IW 24 Apr 2008 20:17:50]

"cost the banks a fortune"???

Surely you mean stop the banks illegally taking a fortune from their customers (at least via one means).

Will it bring an end to "free" banking?
That's open to question and may be in part scare tactics by the banks designed to try to gain support from people who think they may lose out.

Current accounts pay negligible interest and banks profit from transaction fees when accounts are used to transact with businesses.
Thus they are making money form people holding accounts anyway.

If all banks and all accounts were to charge fees, it would suggest a lack of competition in the market and possible cartel operations.

Incidentally despite the defence, the banks have been aware of the legal vulnerability of these charges for a number of years.
Having worked in financial services myself I saw efforts to "repackage" things to work around the law a number of years ago. (Older terms were even more clearly illegal).

Theft - the intention to permanently deprive someone of their property... somehow I doubt we'll see criminal prosecutions though.