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Banks have largely won the latest round of a High Court battle over the fairness of overdraft charges.

Judge Mr Justice Andrew Smith says that most bank customers will not be able to challenge under common law charges levied mostly between 2001 and 2007.

But NatWest customers might still have the legal avenue open to them after he failed to give their terms a clean bill of health.

More cases will be heard before the bank charges debate is concluded.

The ruling comes after a three-day hearing in July and has an impact on the thousands of claims for the refund of overdraft charges frozen in county courts.

Frozen

These hearings were suspended when the Office of Fair Trading and eight banks agreed on a test case to clarify the situation with overdraft charges.

These hearings will almost certainly remain frozen for the foreseeable future.

The OFT wants legal confirmation that it can rule if these charges of up to £35 are fair or not. Customers complained they had unfairly been overcharged hundreds, and sometimes thousands, of pounds when falling into the red.

But the banks have been aiming to protect the estimated £3.5bn a year of income they gather by charging people for going overdrawn.

The OFT has been investigating the fairness of these controversial bank charges since April 2006.

Latest hearing

The judge's latest ruling was focussed on whether historic bank terms are unfair penalties under common law, and so available to be challenged by customers who have been charged for going overdrawn.

He decided that Barclays, Clydesdale, HSBC and the majority of Abbey's terms were unable to be challenged.
A Barclays spokesman said they were "pleased" with the decision.

The same was true for HBOS, except for Intelligent Finance's terms which required more examination. More discussion was also needed regarding the terms and conditions of Lloyds TSB's accounts.

But the judge said that there was further work to do by the Royal Bank of Scotland Group, which owns NatWest, for him to give them clearance.

"Some banks will be breathing a sigh of relief as the judge appears to have decided that these charges were not penalties under common law," said Marc Gander, of the Consumer Action Group.

He said it was "extraordinary" that the judge seemed to have decided that customers were not charged because they had breached a contract.

But those with claims will be affected by a number of High Court decisions to come.

There will be an appeal by the banks against the OFT's initial High Court victory in April that ruled that the OFT can assess whether fees are unfair.

Another High Court hearing is expected to start in the new year on the substantive issue of whether or not bank overdraft charges are unfair.

Only after these hearings, and any possible subsequent appeals, will people finally know whether they can claim back overdraft charges.

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The main UK banks have been told by the Office of Fair Trading (OFT) that their overdraft charges are probably unfair.

The OFT's view is revealed in a confidential memo circulated among senior staff at RBS/NatWest.

The regulator tells RBS it has "serious concerns" that its overdraft terms might be unfair to its customers.

In April, the High Court, in the first of a series of legal rulings, said the OFT had the right to scrutinise the fairness of the banks' current charges.

In one of the biggest consumer revolts of modern times, hundreds of thousands of claims for the refund of bank charges were lodged by aggrieved bank customers in county courts up and down the country, and with the Financial Ombudsman Service (FOS), in the course of 2006 and 2007.

The customers complained they had unfairly been overcharged hundreds, and sometimes thousands, of pounds when falling into the red.

"Serious concerns"

The OFT wrote in the middle of August to all the banks whose terms and conditions it had been scrutinising.

It has told RBS that it has "serious concerns" that the terms may be unfair.

RBS Internal Memo

At that stage all it would say in public was that "at this stage, no bank's terms have been given a clean bill of health and all banks remain under investigation."

"The purpose of the letters is to start a dialogue with each bank to enable us to reach final conclusions as to whether the terms are unfair, and to identify which issues may need to be resolved in court proceedings," the OFT said at the time.

The leaked RBS/NatWest memo makes it clear what the OFT really thinks.

''The OFT has written to the test case banks with its preliminary views on the fairness of administration charges terms," says the memo.

"It has told RBS that it has "serious concerns" that the terms may be unfair.

The memo states that "RBS is considering its response. This is a key step towards phase 2 of the test case, which is not due to start until early 2009''.

Nick Spooner, of the campaigning website Legal Beagles, said the OFT's view was inevitable.

"The OFT would not have spent all this time investigating the issue if it did not believe the charges were unfair," he said.

"But I believe the OFT should now make public the fact it thinks the charges are indeed unfair," he added.

Many hearings to come

The OFT has been investigating the fairness of these controversial bank charges since April 2006.

But the growing deluge of court cases led, in July 2007, to the banking industry coming to a deal with the OFT, FOS and the Financial Services Authority (FSA).

All current and new bank charge cases would be put on hold until the underlying legal issues had been thrashed out in the courts.

That eventually led to the OFT's initial High Court victory in April.

In an increasingly complicated set of litigation, there are at least four more High Court decisions to come, with more if there are any appeals.

• this autumn Mr Justice Andrew Smith will rule if the OFT can also scrutinise the fairness of the historic terms formerly used by banks for their overdraft charges in the past
• he will also rule if any historic bank terms are unfair penalties under common law, as well as potentially under the 1999 Unfair Terms in Consumer Contracts regulations
• in October there will be an appeal by the banks against the OFT's initial High Court victory in April
  and in late 2008/early 2009, a High Court hearing is expected to start on the substantive issue of whether or not bank overdraft charges are unfair - in effect a challenge by the banks to an anticipated adverse ruling by the OFT.

Ray Cox, a leading banking QC, said: "If this opinion of the OFT is confirmed with regard to the current charging structure, it is difficult to see how the banks will be able to have a system resembling their current overdraft charges at all."

An RBS spokesman replied that the OFT's letter was just the start of the next phase of the ongoing litigation.

"The OFT's conclusions will be tested by the court," he said.

After a parallel investigation into the operation of bank current accounts generally, also launched in April 2006, the OFT concluded last month that they were "not working well for consumers".

It pointed out that overdraft charges generated an income of £2.6bn a year for UK banks, and that much of this money was "derived opaquely" from customers.

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Millions of Barclays Bank customers will be affected by radical changes to the way it charges for going in the red.

The bank claims the changes to its overdraft packages - to be introduced on Monday - will help those who exceed their agreed limits.

Customers who go into unauthorised territory will now be given a "personal reserve", an agreed buffer over and above their authorised overdraft limit (the average buffer is expected to be £250). No interest will be charged on this amount and they will incur no charges or fees for having the service on their account when they are not using it.

This isn't free, of course: if customers use it they get charged £22 for every five days, although payments won't be bounced while you're within the reserve limit. Use it for the entire month and the charge is £88.

At the moment, those who exceed their limits are charged £30 per time up to a maximum of £90 in any one month. If a customer goes beyond their Personal Reserve limit or they do not have a Personal Reserve and have spent beyond their agreed limit then items will be returned unpaid (unless a guaranteed transaction) and a fee of £8 will be charged.

Andy Harris, head of current accounts for Barclays said: "We know from our research that customers appreciate the certainty, simplicity and transparency that Personal Reserve will bring. Most competitors' overdraft charging structures are highly complicated and difficult for customers to understand. The benefit of the new Barclays structure is that a customer knows exactly what payments are going to go through, what they are going to get charged and when."

But Kevin Mountford, head of current accounts at moneysupermarket.com, is unconvinced. He said: "There is real confusion and lack of transparency when it comes to overdraft charges. Several banks have tried to simplify this, the latest being Barclays with its Personal Reserve. However, I don’t think they are making the system any easier for consumers as the Personal Reserve isn’t as clear as Barclays make out, indeed it has had to set up a video blog just to help explain it to customers.

"The truth of the matter is that if overdraft charges were lower banks wouldn’t need to resort to confusing 'reserves' and 'buffer zones' to try and make the charges more palatable.

"Barclays has declared 90 per cent of customers it approached have ‘chosen’ to accept the offer of a Personal Reserve, however as this was a positive opt out I am not sure if the acceptance rate is as much to do with customer apathy or confusion, as much as anything else.

"Time will tell whether Barclays has created a useful current account innovation, or simply added further confusion to an already chaotic market."

The new system will not help those who stay within their agreed limit, as the authorised overdraft rate jumps from 15.6 per cent to 17.9 per cent.

Pundits reckon that the accounts best for people who regularly go into the red but stay within their limits are from Alliance & Leicester (its Premier account is a longstanding favourite), Abbey and Norwich & Peterborough building society.

Each of these institutions has a 0 per cent offer of some description - Norwich & Peterborough on overdrafts of up to £500, and the other three for an introductory period of 12 months.

New customers at Barclays get 0 per cent for the first year too.

Andrew Hagger of Moneynet.co.uk says: "Five days should be sufficient for the majority of people to return their account to order or contact the bank to discuss the possibility of a temporary overdraft increase. A further positive is that Barclays is also reducing the charge for unpaid items from £35 (max one charge per day) to £8 per item from 18 August.

"Whilst the move from Barclays seems to be attracting some unfair criticism surrounding a lack of transparency, the deal is fairer and a big improvement on the previous charging structure."

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Hard up bank charge claimants are being urged to avoid unsympathetic courts and go direct to the Financial Ombudsman to reclaim their cash.

More bank customers suffering financial hardship due to bank charges have had their cash refunded through the Financial Ombudsman Service over the past year than through the courts.

Banks have been allowed to stall payment of reclaims until the end of the ongoing High Court battle thanks to the bank charges waiver that was granted by the City watchdog, the Financial Services Authority.

However, the waiver includes provisions for those suffering severe financial hardship due to hefty charges levied on them for going overdrawn to have their case heard - either through the courts or via the FOS.

Just 1,250 of those in financial difficulty have placed claims with the FOS, while the number looking for redress through the courts is likely to be many times that figure.

Just over a fifth have had their claims upheld by the FOS and had their money refunded by banks, while a further quarter have been judged to be suffering unduly due to the charges and are likely to receive refunds.

This means over 45% of cases heard by the FOS have been taken further, in contrast to anecdotal evidence from the courts – where it is believed the majority of individuals seeking redress have been turned down.

Although there are no official statistics for the amount of claimants turned down by the courts, a This is Money poll last month found three quarters of those who had sought money through the courts have had their case thrown out.

As claimants cannot apply to the FOS once the courts have considered their case and turned it down, this means any bank customers struggling to make a living due to unfair charges should apply to the FOS with their claim and discount the courts altogether.

Banks were so compliant with the 250 cases settled since the waiver was introduced last year, the FOS did not have to force their hand with a formal ruling, according to Emma Parker from the FOS.

She said: 'So far the process has been very co-operative. We have not had to make a formal ruling. We have talked to the banks and asked them to resolve the situation and they have, so it hasn't got to that stage.'

Of the approximate 1,250 financial hardship cases the FOS has dealt with over the past year, 250 have been successful, 300 individuals are judged to be suffering financially and are in the process of being dealt with and 700 were either not severely affected financially, or their difficulties do not directly relate to bank charges.

The amounts won over the year differ greatly and range from hundreds to thousands, according to Ms Parker. She added that success is not guaranteed in all cases and each claim depends on its own 'individual merits'.

In our website poll, 49% of readers who voted said they were finding it difficult to make ends meet due to unfair bank charges. Of these, a substantial 42% said they had carried their claim through to the courts in an effort to have their case heard under the banking waiver.

Of the latter, the vast majority at 75% had their case turned down despite their pleas that they were finding it difficult to survive because of hefty charges.

The eight High Street banking institutions at the centre of the High Court case are currently appealing a ruling made earlier this year, which allowed the Office of Fair Trading to assess the fairness of bank charges.

The appeal cannot extend beyond the end of 2008 but, if the banks are unsuccessful, the following battle between them and the OFT could extend until the end of 2009 or beyond.

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Confusion over whether business bank account holders can reclaim their bank charges may force the Financial Ombudsman to launch an official inquiry into the issue.

This is Money first reported in April that business bank account customers will no longer be able to reclaim unfair bank charges due to a landmark ruling in the High Court.

Although the High Court bank charges battle pertains to mainly to personal accounts, the judge at the centre of the case said at the time that business account charges are not penalties as such and can be enforced by banks.

The Financial Ombudsman's Service (FOS) has been processing business bank account claims since then, but is seeing an increasing number of small banks refusing to take part in the negotiation of business account reclaims.

Emma Parker from the FOS said: 'The judge said he didn't think that business account charges were penalties. It's a technicality, but it's affecting the stance of some of the smaller banks. The big banks are still settling claims on a goodwill basis but smaller banks are taking a step back.

'We're not at a point where we will have to have a formal inquiry yet, but that may be on the cards.'

The issue of business bank account charges has been frustrating for those small businesses wishing to reclaim their charges over the past few months as the High Court has refused to clarity its ruling.

Official bodies such as the FOS, the Financial Services Authority or the Office of Fair Trading also do not know whether these customers can technically continue to reclaim.

Up until the April ruling, business account holders were able to continue reclaiming despite the general waiver granted to banks on reclaims as, unlike personal accounts, business accounts are covered by common law instead of consumer law.

However each type of customer can still suffer charges of up to £39 a time for incursions into 'unauthorised' overdrafts.

The judge said in the small print of his ruling in April – which is now being appealed by the eight High Street banks involved – that 'the terms now generally used by the banks' in relation to business accounts could be enforced.

Some commentators have suggested the phrase 'now generally used' means only charges levied over the past 18 months cannot be reclaimed – and those customers with charges going back over a longer time period may still be successful.

The situation will remain unclear however until one of the official bodies mentioned above clarifies the meaning of the original ruling.

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Banks will rake in £1.3bn over the next six months after being allowed to carry on levying punitive overdraft fees.

The bonus comes as a result of their dragging out a long-running court case on the legality of penalties of up to £38 a time for unagreed overdrafts or bouncing a cheque.
The Office of Fair Trading (OFT) launched a High Court battle against the banking industry and won an initial judgment that should ensure refunds are paid.

However, the banks are pushing the case through the appeal courts with the result that payments are being delayed and charges are still being imposed.

The City watchdog, the Financial Services Authority (FSA), has allowed the banks to put the handling of complaints and refunds on hold until the case is settled.

The move has been described by critics as 'a kick in the teeth' for millions of customers. This so-called waiver was introduced in July last year and was due to end this month - a year in which the banks will have collected £2.6bn in overdraft fees.

Yesterday, the FSA said it would allow the waiver to run another six months, until January 2009, allowing the banks to collect a further £1.3bn.

There is every chance the banks' appeal will go all the way to the House of Lords, which could delay any compensation for customers until well into next year.

The FSA said the delay will not affect the ability of bank customers to claim refunds of charges going back to 2001 once the case is finally settled. And while a general waiver for dealing with refunds has been established, the banks will be required to handle complaints involving customers suffering real financial hardship.

Louise Hanson, of the consumer group Which?, said: 'Scrapping the waiver won't get people their money back. Only the banks can do that by conceding defeat and paying up instead of continuing to string out the process.'

Dan Waters, of the FSA, said: 'Our objectives continue to be certainty over this complex issue and a fair and consistent resolution of consumer complaints about unauthorised overdraft charges.

'The FSA has reviewed the circumstances and has decided to offer firms a new waiver for six months, when we expect to have a Court of Appeal decision.'

The watchdog has the power to lift the waiver if it believes the banks are dragging out a resolution of the case unnecessarily.

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A major High Street bank has broken the terms of the legal waiver that allowed it to put all overdraft charge complaints on hold.

Bank of Scotland, part of the giant HBoS group, appointed debt collectors to chase a customer who had contested charges imposed when he accidentally went into the red.
Under the legal waiver drawn up by City watchdog the Financial Services Authority (FSA), banks have been given permission to put on hold all bank charge complaints until their court case with the Office of Fair Trading has been resolved.

But they are not allowed to close a customer's account or do anything that adversely affects their complaint.

Bank of Scotland had admitted that the account was 'accidentally' sold to a debt collection agency and that, under the terms of the waiver, this should not have happened.

The customer, who does not want to be named, had sought a refund of £2,113.27 worth of bank charges in December 2006. The complaint had been acknowledged, and he and the Bank of Scotland had exchanged a series of letters.

When the OFT court case was announced, the customer's complaint, like thousands of others, was put on ice. He had dipped overdrawn by just a small amount - £40. On the back of this, charges mounted.

Bank of Scotland charges £35 for bouncing or paying a cheque or transaction if you are beyond your overdraft limit. It also charges £28 a time for dipping into the red.

He was soon in financial difficulty as charges started to be imposed on charges - pushing him further into the red. By the time he was told of the waiver, he was almost £1,000 over his £1,250 authorised overdraft.

He stopped paying his salary into his current account as it was only enough to cover the bank charges. Last month, he received a further letter from the Bank of Scotland stating: 'As previously agreed with the Financial Ombudsman Service and FSA, customer complaints relating to unarranged overdraft charges will remain on hold.'

However, Bank of Scotland then cancelled his authorised overdraft.

On July 8, CapQuest Debt Recovery wrote stating that his White Label Current Account 'together with others' had been 'sold' and that it had been appointed to 'manage your account in all matters relating to collection and litigation'.

It also stated: 'Legal action will increase the amount you owe and may have a detrimental effect on your credit worthiness.'

Under the FSA waiver, current accounts still run in the normal way - you can still incur unauthorised overdraft charges and the actual account is not frozen. This has confused many.

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Bank charges came under renewed scrutiny yesterday after a student claimed she had been charged more than £800 after going just 8p overdrawn.

Lloyds TSB has threatened Laura Gibson, 20, of Cheltenham, with legal action to recover the debt, which began when she made a £60 purchase in September.

The purchase put Ms Gibson 8p in the red which immediately triggered a fee of £65. As Ms Gibson did not clear the overdraft she was charged a further £30 in October, £60 in December and £78 in January. Then in May, Lloyds TSB increased its unauthorised overdraft charges to a flat rate of up to £20 a day.

She said: "This whole episode has been an absolute nightmare. I've now paid more than £300 in charges but still they want more. I've stopped using the account and the way I've been treated is disgraceful."

Ms Gibson, who is enrolled to start A-Levels in September, says the stress of the charges contributed to a nervous breakdown.

"Lloyds TSB have been harassing me by telephone and by mail, putting pressure on me to pay this money back. I feel that it is morally irresponsible that the bank can charge people such ridiculous amounts of money especially when some of the charges amount to more than my income each week."

A spokesman for Lloyds TSB said: "The charges that Ms Gibson has incurred are not for a one-off unplanned overdraft position of eight pence, they relate to an unplanned overdraft of varying amounts dating back to September 2007.

"In situations where there are extenuating circumstances, such as illness, that may affect a customer's ability to manage their finances, we can consider waiving part or all of the charges that they have incurred. We will be contacting Ms Gibson again to discuss her personal circumstances."

Watchdog attacks the bank’s £165 charge for falling into the red

Lloyds TSB was named last week as the worst offender for punishing customers who fall briefly into the red.

Those in the Lloyds TSB Classic Plus account who exceed their agreed overdraft limit by £50 for two weeks are charged £165, finance website Moneynet.co.uk reports. This compares with HSBC’s £25.10 charge and £30.52 by Barclays. Alliance & Leicester, second after Lloyds, charges £95.

A damning report by the Office of Fair Trading (OFT) last week said that banks rake in about £8.3 billion from current account charges. The charges are equivalent to £152 per account and represent greater income than savings and credit cards combined.

The report also accuses banks of being opaque about how they derive revenue from accounts, confusing customers and making it difficult to compare deals.

John Fingleton, OFT chief executive, said: “Personal current accounts are a vital gateway to effective participation in the economy. But this market is not serving consumers well.”

Meanwhile, the OFT has taken banks to court over the legality of overdraft charges, although banks are appealing against the court’s verdict that they come within the OFT’s remit. A second hearing on whether the charges are unfair and what a fair charge would be has been delayed until the appeal is heard.

The OFT was particularly critical of lenders that charge a high interest on overdrafts, but offer negligible or no interest on current accounts. Fingleton said these were “a type of stealth payment”.

The report says banks make almost twice as much from paying poor in credit rates to customers than they make in levying charges. Income generated from not paying higher rates of interest is estimated at £4.6 billion, while charges associated with insufficient funds are £2.6 billion, it says.

First Direct, Barclays and the Co-op do not pay interest on current accounts, while Royal Bank of Scotland and NatWest pay only 0.1%.

Michelle Slade, analyst at Moneyfacts.co.uk, the comparison site, said: “The fact that these institutions pay no or little credit interest is disgraceful. With inflation as high as it is, anyone with money with these banks is effectively losing money.”

The best interest rate is Alliance & Leicester’s Premier Direct account. It pays 8.19% on balances up to £2,500 but 0.1% on sums above this. At least £500 has to be paid into the account each month.

Cahoot pays 3.69%, the highest in-credit interest rate without any catches. If you want a chequebook with the account, the rate is 3.59%.

Bank charges for those regularly in the red rose by 17% between 2003 and 2007, the OFT reported. About 12.6 million accounts, or 23% of UK accounts, incurred at least one unauthorised overdraft charge in 2006. Such people should choose an account with a low overdraft rate. Norwich & Peterborough building society offers 0% on authorised overdrafts for six months, then charges 7.74%.

Most bank customers are unsure how bank charges work. Moneyexpert, a comparison website, said 71% of customers described bank charges as unclear. Only 17% understood the charges.

Moneyexpert said: “One logical conclusion of the OFT report would be to remove the less visible fees imposed by banks and replace them with simple monthly charges similar to the existing ‘packaged account’ model.”

However, it is feared that a crackdown on charges would result in the end of “free” banking. A spokesman said: “If and when the decision is made to cap the unauthorised overdraft fees and unpaid charges it is inevitable that we will move towards paying monthly or annual fees for our personal banking.”

Angela Knight, chief executive of the British Bankers Association, said: “Yes, you can incur charges if you do things without making arrangements first, but do you really want to pay for ATM use, pay for statements, pay for direct debits in this country?

“Surely people don’t. The Office of Fair Trading unfortunately does need to perhaps look at that balance as far as its report is concerned.”

Lloyds TSB dismissed the Moneynet study.

A spokesman said: “The most common scenario for our customers is to be overdrawn for only one day, in which case they would be better off with us than with many of our competitors.”

The OFT study began in April last year.

In 2001 the Cruickshank Report said that savers were not adequately informed and found financial products difficult to compare.

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Banks have been given another six months grace to put off dealing with customers who want their overdraft charges refunded.

The Financial Services Authority (FSA) has extended a decision which it first put in place a year ago.

The FSA said it had done this to help the courts decide the fairness of bank overdraft fees.

Bank charge campaigners said they were not surprised, but argued the situation was grossly unfair to customers.

'Unhappy'

It is thought that tens of thousands of bank customers have had their complaints put on hold pending a resolution on the legality of overdraft charges.

Marc Gander, of the Consumer Action Group (CAG), said banks should be stopped from continuing to levy overdraft fees on customers who had lodged complaints.

"It's about time that there was some reciprocal obligation on the banks to stop their enforcement procedures," he said.

"They should be stopped from defaulting people on disputed sums and instructing debt collection agencies on a matter which the banks are likely to lose," he added.

However, the consumers' association Which?, which has also been campaigning on the issue, described the waver as a necessary evil.

"Scrapping it won't get people their money back - only the banks can do that by conceding defeat and paying up instead of continuing to string out the process," said Louise Hanson of Which?

Hardship

The FSA explained that it was extending the suspension of its normal rules, which require banks to deal with complaints promptly, because the High Court has still not decided if bank overdraft charges are unfair or not.

Banks "will not be required to handle complaints relating to unauthorised overdraft charges within the time limits set out in the dispute resolution manual," the FSA said.

The regulator also pointed out that it had made its guidance to banks on dealing with hardship cases more explicit.

Defining hardship as an income "insufficient to cover reasonable living expenses and meet financial commitments as they become due," it said that banks might deal with customers in this situation by waiving charges in the future, or not enforcing past ones if the debt itself consisted of previous overdraft fees.

Despite this, another bank campaigner, Martin Lewis, said the waiver extension was a "kick in the teeth".

"It's nearly a year since the FSA first kiboshed reclaiming, and people are still sitting on their hands, unable to try to reclaim money," he said.

"How long are people expected to wait? Another six months? Until it goes to the Court of Appeal? The House of Lords? The European Court?" he asked.

More hearings

The FSA says it will review the waiver again before it expires at the end of next January.

Meanwhile the general stay on new cases being dealt with in the county courts and with the Financial Services Ombudsman (FSO) is also still in operation.

A second round of High Court hearings involving the banks and the Office of Fair Trading (OFT), which may finally decide if bank charges are fair or not, is expected to start before the end of the year before Mr Justice Andrew Smith.

Earlier this year he ruled that the OFT had jurisdiction in the matter, and he has recently been asked to rule if fees levied under previous bank terms and conditions can also similarly be assessed by the OFT.

But any appeals on the issue of the OFT's jurisdiction, or the fairness of the fees themselves, could drag out the issue far into next year

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