Back in the Dock Over Overdraft Charges...

The OFT will argue that these charges do not reflect the true admin cost born by the banks. A recent report by the BBC estimated the cost of processing a bounced cheque at £4.50, whilst in practice some banks charge up to £25. Many charge even more for customers exceeding their overdraft.

The banks assert that these charges are fair, clear and allow them fund free current accounts for those who stay in credit. Their consumers, however, do not appear to agree. What started as a trickle of complaint has swelled into a flood of angry protest, with over 1 million consumers fined for exceeding their overdraft or bouncing a cheque writing to ask for their money back.

The banks were initially keen to settle complaints quietly. HSBC’s latest results show that the bank has refunded £120 million to over 70,000 customers in the first half of the year. Meanwhile mounting pressure has forced some cases to Court – only to find different judges delivering different verdicts.

Are the charges legal? A 19th century court case established that any charge which does not reflect the true cost of an item is a penalty, while over a hundred years later, Murray v Leisureplay confirmed that a penalty clause cannot be enforced. Alternatively, if the High Court finds that the fees levied are unfair on consumers, they would be illegal under the Consumer Contract Regulations 1999.

The OFT and the nine banks involved hope that the High Court will be able to settle this question once and for all. Yet if the court decides that the charges are illegal, the banks could be forced to offer a mass refund of their penalty charges. Many have warned that this could signal the end of free current account banking.

Don’t hold your breath, as it could take over a year for the Court to reach a verdict. Moreover, the OFT has agreed that the banks are not obliged to settle any complaints on this issue while the court case is ongoing – so customers who’ve already written to ask for a refund face a long wait.

In the meantime, the best way to avoid penalty charges is simply to stay in credit. This can be difficult in times of change, so it’s a great idea to set aside some money for with emergency situations or unexpected events. And as a result of recent interest rate rises, there are some great deals for savers available.

Adela Read
Financial Journalist

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