This is Money

The Tories 'white paper' on banking reform, released today, is the first major political document to brand bank charges 'unfair' and would force overdraft, credit card and mortgage charges to be clearly shown.

Among details of the party's plans for sweeping financial reform, it says: 'There have been numerous examples of unfair treatment of consumers – the mis-selling of payment protection insurance and unfair bank charges.'
Although the Competition Commission restricted banks ability to charge PPI earlier this year, it is still unclear whether the OFT will win its legal battle with eight High Street banks over the fairness of bank charges.

If the case, currently in the House of Lords, drags on past the next general election, which the Tories are expected to win based on current opinion polls, it is unlikely a new Government would be able to intercede.

The Tories' white paper also details how the party would set up a new Consumer Protection Agency.

This will take over the oversight of consumer financial matters from the Office of Fair Trading (OFT) and other powers from the Financial Services Authority, which would be abolished.

Banks and credit card providers have to be clearer about their charges, the paper recommends, before saying the party will set-up an independent financial website highlighting whether individual products are any good.

Providers will have to include a standard 'summary box' on all documentation sent to customers, which should make it easier for them to compare products.

All very welcome, with a hint of deja vu...

This is Money's banking and credit card correspondent Alan O'Sullivan says: The fact that a major political party has come out and branded bank charges unfair should be celebrated although, given the legal case on charges is now in its latter stages, they could have stepped in sooner. If they had – and forced Labour into tagging along with them – then the entire legal debacle with the OFT could have been avoided through a Parliamentary vote.

Although the wider changes to the banking system outlined in the white paper smack as necessary, given the tripartite system's overall failure on banking regulation, it is still unclear whether the Tory plans will greatly help consumers on a day-to-day basis.

For example, what is this Consumer Protection Agency other than an OFT by another name? From anecdotal evidence, it appears the OFT takes quite a while to deal with consumer complaints, given the tidal wave it has to deal with.

It takes thorough investigation and time before it will ever 'name and shame' a company, and this only happens after said company has carried out particularly heinous crimes over a long period. But that's understandable, in a way, given the number of companies it has to regulate (125,000 with consumer credit licenses).

How will this CPA do things differently? More people and funding? We've heard all that before.

And the Tories plan to create an independent website over all financial products? The OFT promised in February 2008 to create a truly independent credit card comparison website for consumers – which we're still waiting for.

This is one reason why the status quo should perhaps be shaken up, but it also means these shiny new promises may be written on the same Whitehall headed notepaper.

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The legal debate raging in the House of Lords over banks' obligation to repay charges and fees to customers has thrown up a new anomaly that could alter the outcome of the case.

One of the banks' barristers, Jonathan Sumption, alleged in the House during the week that a consumer victory would cripple banks financially, forcing them to return billions of pounds in past overdraft charges and pay what he terms 'restitution'.
Marc Gander - the head of the influential bank charges lobbying organisation Consumer Action Group (CAG) - has interpreted this as meaning banks would not only have to refund any bank charges levied on customers: they may also have to repay any of the profit they earned from investing the funds in the interim.

If the Office of Fair Trading (OFT) wins its legal battle against eight High Street banks, any 'restitution' payment could substantially swell any potential repayments to customers, who could receive all their refunded charges as well as a portion of any profits the banks have made from investing them.

However, there is disagreement over what the legal term 'restitution' could mean and the impact this could have on the banks and their customers' claims. There is also debate over whether customers may be able to reclaim all charges levied over an extended period of 19 years in the event of an OFT victory, instead of just six years as previously thought.

The legal term 'restitution' means the claimant in any case must receive compensation that restores them to the same financial position they were in before their claim. However, it can also mean the defendant, in this case the banks, must hand back any profit made from the disputed funds, termed 'unjust enrichment'.

If banks' overdraft terms are found to be unfair, consumers may also be able to reclaim funds back as far as 1995 – the year European rules on consumer contracts came into force – and as far forward as six years after any judgment from the House of Lords, due this autumn.

Currently, customers can only claim back six years from the date of their claim.

Daniella Lipszyc, a contract specialist and director of Manchester-based law firm Ultimate Law, said there is a 'fair chance' claim periods may be extended, but dismissed the chances of consumers sharing in banks' profits as a 'flight of fantasy'.

She said: 'It may be arguable as a point of law, but the argument is obscure and I think there is little chance of claimants getting a slice of this. Restitution usually means a person just gets back the money they have lost.'

However Mr Gander, a former law lecturer, added: 'The banks wouldn't have made such a big deal out of this term if it just meant the repayment of charges. They're running scared and petrified of not just losing billions in bank charges, but the tens of billions in profits they made from them. Claims could literally balloon.'

It is difficult to price the possible fallout if banks lose their legal case, but Nationwide Building Society said during the week that 12.6m people paid overdraft fees across the industry in any one year. A survey by CAG of 10,000 claimants found the average bank charges claim has been worth £1,800 in recent years.

Any possible repayments could therefore cost the banks billions of pounds, which could be multiplied several times over if they are also expected to part with profits earned from these funds.

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Bank charges can now be assessed for fairness by the Office of Fair Trading after the High Court ruled in its favour today.

The announcement could mean bank customers will be able to reclaim billions of pounds in punitive bank charges later this year, if the OFT decides the charges are unfair as expected.

The ruling comes at the end of an appeal case brought in October last year by the eight High Street banks following the High Court's similar ruling in favour of the OFT the previous summer.

However, the banks have the right to appeal this judgment yet again to the House of Lords, potentially delaying the OFT's investigation by a further six months to a year.

The British Bankers' Association confirmed the banks have put in a request to see if they can appeal to the House of Lords, but stressed this does not mean they plan to proceed.

A spokesperson said: 'You have to ask if you can appeal before you decide if you are going to appeal. It's just a legal process. The banks are keeping their options open.'

Even if the banks do not appeal, consumers will not be able to reclaim their bank charges until the OFT delivers its final assessment on whether the charges are fair.

It has already begun its investigation into the overdraft charges and, if banks do not hold up the process further, it expects to report its findings later this year.

The OFT said in a statement: 'The Court found that these terms are not part of the core or essential bargain between a consumer and their bank, and therefore consumers do have protection under the Unfair Terms in Consumer Contract Regulations for these terms. 'We are now analysing the implications of the judgment for our ongoing investigation.

'The OFT has already written to the banks with its provisional view on the fairness of the terms, setting out its concerns that they may be unfair. We expect to reach a final decision on fairness later this year.'

However, it warned the process would be complex as the investigation involves each bank's terms and conditions over the past six years.

Banks have claimed today's ruling could spell the end of free banking in the UK as the banks could lose up to £2.6bn a year in lost revenue as a result. However, campaigners argue it is wrong to subsidise fee free banking by treating other customers unfairly.

Furthermore banking industry experts doubt that banks will pull fee free bank accounts due to the huge cross-selling opportunities they offer compared to their relatively low cost to run.

Banks could have to refund billions in bank charges levied over the past six years. RBS is already planning to proactively refund all bank charges to its customers if it eventually loses its case against the OFT.

Marc Gander, head of the bank charges campaign organisation Consumer Action Group, said the banks will think twice before fighting today's judgement.

He said: 'The only thing that would stop the banks appealing is their public image. To drag this on yet another year by taking it to the House of Lords after delaying the case a year already, I think would mark them out as the people's enemy when their reputation is bad enough already.

'I'm not sure they would have the gall to do that. They may be so reluctant to draw this on that they may throw the towel in.'

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