The Guardian

Guardian
Customers are being charged an average of 167% a year on unauthorised overdrafts, once fees and penalties are taken into account, according to a report from SG Hambros. The additional charges people face when they go overdrawn can include a fee for using their overdraft, a charge for direct debits which are honoured (even though there is insufficient money in the account) and a fee for any payments that bounce.
Research carried out for last night's Panorama programme on BBC One found that the fees charged are far higher than the rates advertised. High streets banks charge, on average, an annual rate of 32% for an authorised overdraft on some accounts despite advertising rates of around 19%.
Barclays Bank's fees for an unauthorised overdraft are equivalent to a 220% annual interest rate, while Bank of Scotland's daily fees for those with an unauthorised overdraft took their interest rate to 365%.
Christine Ross, SG Hambros group head of financial planning, told the BBC: "What we found is that unless individuals really scrutinise the small print, the overdraft rates charged are far higher than they could even imagine. Because it's not just the main headline rate that counts but all the other fees that are added in, fees that people possibly wouldn't think about."
Business Secretary Vince Cable accused the high street banks of "ripping off" their customers and failing to be transparent over the fees they levied. He told Panorama that consumers were losing out because of a lack of competition in a marketplace dominated by a small number of big banks. "Consumers have been ripped off, get a very bad deal, are affected very much by the complexity of a lot of financial transactions that are not transparent," Cable said.
But the British Bankers' Association defended the charges, pointing out that because overdrafts were designed to be used for only a few days, it was impossible to calculate accurate annual lending rates. A statement said: "Anyone who finds themselves in the position of needing regular overdraft facilities, or where the borrowing is going on over many months, should seek help from their bank with budget planning or advice on what type of loan would best suit their circumstances."
At the end of this month, banks are due to begin publishing illustrative scenarios on their websites showing unarranged overdraft charges, giving consumers an idea of the costs for different patterns of use. The case study-type scenarios are part of the deal struck with the Office of Fair Trading in October last year to make personal current account costs more transparent and the switching process more reliable and trusted.
In a statement, the BBA said banks have no desire to hide the cost of borrowing from their customers: "Information is clearly set out on bank websites, displayed in branches and sent to customers with their statements."
Yet under some scenarios the rate of interest and charges can reach four figures when it is calculated on an annual basis. Halifax, owned by the part-nationalised Lloyds Banking Group, charges customers who go overdrawn a flat fee of £1 a day. As a result, if a customer had an overdraft of £10 they would pay the equivalent of 3,650% in annual interest and charges.

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The latest round in the legal row over the legality of bank charges for unauthorised overdrafts started today, as banks took their appeal to the House of Lords.

Seven banks and a building society are asking the law lords to overturn rulings by the high court and court of appeal that the fees are covered by "unfair contract" rules and can be scrutinised by the Office of Fair Trading (OFT).

Banks have been charging consumers up to £39 every time they bounce a cheque or refuse a standing order or direct debit because of a lack of funds, although critics of the system say the actual cost incurred by the institutions could be as little as £2. The fees are estimated to earn current account providers about £2.6bn a year.

After thousands of consumers reclaimed the charges by threatening to take their banks to court, a test case was brought between the OFT and Abbey, Barclays, Clydesdale, Halifax Bank of Scotland and Lloyds TSB (which are now part of the same group), HSBC, Royal Bank of Scotland Group and Nationwide building society.

The court found in favour of the OFT, then earlier this year a ruling by the court of appeal backed it up and it looked as though current account providers could be forced to return up to £1bn to consumers.

This could be the final chance the banks have to get the decision overturned and avoid having to cut their charges and refund customers. The appeal is set to last three days, but the decision is unlikely to be published until the autumn.

In the meantime, the banks will be able to continue charging, and tens of thousands of customers will have their appeals kept on hold.

A waiver granted by the Financial Services Authority (FSA) in the summer of 2007, when the test case was first announced, means banks and building societies are allowed to hold on to any complaints relating to the case.

Consumer groups had hoped the banks would accept the appeal court's ruling. The chief executive of Which?, Peter Vicary-Smith, said: "It is disappointing that nearly two years since this saga began, little has changed for the millions of consumers being hit with these charges."

He added: "If you're struggling with basic living costs such as rent and utility bills then you may be eligible to get your claim fast-tracked under the terms of the waiver. The FSA must take action against any bank ignoring the financial plight of its customers."

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Banks and building societies could be forced to return billions of pounds to consumers after a court threw out their appeal over unauthorised overdraft charges.

The court of appeal ruled that fees for unauthorised overdrafts and bounced cheques are subject to regulation by the Office of Fair Trading (OFT) under "unfair contract" rules, clearing the way for the watchdog to set a legal maximum on the fees which currently earn banks around £2.6bn a year. The ruling could result in them being forced to return up to £1bn to consumers.

Banks had been charging up to £39 for a bounced cheque, standing order or direct debit, although critics of the system say the actual cost incurred by the institutions could be as little as £2.

The ruling follows a test case last year between the OFT and eight current account providers concerning fees for unauthorised borrowing and bounced cheques, which concluded they were covered by the Unfair Terms in Consumer Contracts Regulation of 1999.

Since then many current account providers have adjusted their charging structure and reduced their fees. But many still charge more than £12, which the OFT set as a maximum default charge on credit cards and could introduce to the current account market.

In today's judgment the master of the rolls, Sir Anthony Clarke, sitting with Lord Justices Waller and Lloyd, held that the charges for unauthorised overdrafts were not part of the "core or essential" bargain between bank and customer, and therefore an assessment of fairness was not precluded by the regulations.

Waiting on an appeal

Although the banks could apply to the law lords for permission to appeal to the House of Lords, they were not given leave to appeal, a point welcomed by Doug Taylor, a campaigner for consumer group Which? who said he hoped the banks would throw in the towel.

"I think that is a clear sign it is a fairly straightforward case," he said. "In the context of the decline in [the banks'] reputation it would be bizarre if they decided to appeal. For them to engage in spending more money to defend a lost cause would be unfortunate to say the least."

Lawyers for Which? said the banks had 28 days to decide if they would make a further appeal, but in the meantime the OFT will continue to examine the charges. Consumers who have had their requests for fees to be returned put on hold since the test case will have to wait for the OFT's ruling before they know how much they can reclaim.

The OFT welcomed what it called "very clear confirmation" that it could assess current account terms and conditions on fairness. "This judgment confirms the OFT's long-held interpretation of this important aspect of consumer law, and is one that consumers themselves would identify with. It is also relevant to businesses across the whole economy," it said.

An OFT spokesman added: "The judgment means we can go forward and we are now looking to go back to the banks to say whether we think the charges are fair." A decision on fairness is expected later this year.

Consumer Victory

Martin Lewis, the founder of MoneySavingExpert.com, who alongside Guardian Money has been a campaigner against the charges, said it was a "fantastic day" for consumers.

"All gates to victory have now been unbarred; there is now just a tiny latch left to be unlocked," he said. "The smiles on the OFT's faces in court shows it is highly likely it will find that charges are unfair. After that I would hope that within the next year everyone who has had charges unfairly taken from their bank account will get them back."

Lewis said 5.6bn template letters had been downloaded from his website by consumers seeking a refund from their current account providers. A waiver put in place in the summer of 2007 allowing banks and building societies to delay dealing with the letters remains in place, and the Financial Services Authority has not indicated when it will be lifted.

However, Which? said people should continue to send in their requests so they are first in the queue if the OFT does force account providers to repay the fees. Thousands of consumers are believed to be stuck in the court system awaiting the final outcome of the case and payouts, which in some cases could amount to thousands of pounds.

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