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Highly charged

Did “free banking” win the UK bank charges battle? No, it
did not, according to Jill Insley, though

Never has there been a better time for those bank customers who regularly go into unauthorised overdraft to get their finances under control.

Of course, this is easier said than done for those who are struggling financially but, following a shock Supreme Court decision in November, banks appear to have been given carte blanche to charge what they like. It seems that unfortunately, with most banks, getting rid of your overdraft is the only way of avoiding heinously high charges.

The case at the Supreme Court, which had been running for more than two years, was brought by the Office of Fair Trading (OFT) against seven high-street banks and a building society to determine whether the OFT had the legal power to rule on the fairness of overdraft charges.

To anyone who has been on the end of such charges, the result seemed like a forgone conclusion: how could a bank possibly justify charging up to £28 in penalties for going overdrawn without permission, and then £35 each time a direct debit or cheque bounced, plus interest? One newspaper calculated that a Clydesdale Bank current account customer could end up paying £120 in charges and interest by overspending just £10 in a single month.

Given that the cost of dealing with a bounced cheque has been estimated to be nearer £5, "usury" is the word that springs to mind. Unfortunately for millions of banking customers, the Supreme Court judges were not considering the fairness of such charges, but whether they could be tested under the Unfair Terms in Consumer Contracts Regulations (UTCCRs). The judges decided that the charges were part of the price customers paid for banking and therefore the OFT did not have the power to interfere.

Dashed hopes

The judgement did leave some scope for optimism by saying that the OFT had leave to pursue its action against overdraft fees if it could find a different bit of legis­lation with which to challenge the banks. However, hopes were again dashed just before Christmas, when the consumer body said that any investigation into the fairness of current unarranged overdraft charging terms under the UTCCRs would have very limited scope and low prospects of success.

The 1.2 million outraged customers who have been trying to reclaim billions of pounds in fees levied by the banks since 2001 have been left out of pocket and wondering why the OFT brought the case in the first place. However, just because the banks have won this battle does not mean that they have won the war. The OFT says it is now looking to the banks to change their charging structures voluntarily.

A few had already started altering their fee structure for the better while the case was proceeding. Just days before the ruling was due, Santander, formerly Abbey, announced that, from January, its mortgage customers could apply for its new Zero account, which would charge interest only - no fees - for overdrafts, authorised or otherwise.

However, most current account providers are still charging their less financially able customers through the nose for borrowing without permission. These banks have three months to get their fees in order, says the OFT. If they don't, it will call on the government to change legislation so they can be forced to reduce their fees.

The three main political parties all seem to support such a move. The Chancellor, Alistair Darling, noted in his last pre-Budget report that the government "will take action to deliver change if a voluntary approach does not result in a fair outcome for consumers", and both the Conservatives and the Liberal Democrats have expressed support for campaigns for fair bank charges. But fair charges will not be retrospective - the only option now for existing claimants is to pursue their claims through the financial ombudsman.

During and after the case, many customers who have not strayed into unauthorised borrowing have reacted with dismay to any hint that it might result in the end of "free banking" - that banks might reduce the cost of unauthorised borrowing by introducing mainstream banking fees for all customers. Such customers have pontificated about the need for high charges to encourage weaker-willed consumers to handle their financial affairs better. "Why should we have to pay just because they can't manage their money?" they ask.

Let's talk transparency

There are two answers to that question. First, there is no such thing as free banking. Banks made £8.3bn from current accounts in 2006, of which only £2.6bn came from unauthorised overdraft charges, according to OFT estimates. That means that more disciplined customers are still paying an awful lot for their banking services - about £152 a year per account holder.

Let us not forget the interest that banks make out of your money. While fixed-rate savings are earning in the region of 5 per cent and instant access about 2 per cent, the typical rate on current accounts is still 0.1 per cent, leaving a hefty profit margin for the banks.Second, and more importantly, the disproportionately large unauthorised overdraft charges have been paid by those people who can least afford it - people who are often low-paid, with little understanding of how financial products work, and who could be pushed over the edge by a £35 unpaid-item fee. In effect, they have been subsidising richer and - all right, let's admit it - more disciplined banking customers.

During its investigation, the OFT looked very closely at the issue of transparency. It concluded that many customers - even those in credit - were not familiar with the key prices associated with their accounts and were not well placed to determine whether they were getting value for money or to calculate the total costs easily. It also found charges were too complex, making it hard for customers to predict when they would be charged.

Before the ruling, the banks agreed that they would provide better monthly information about people's accounts, provide customers with an annual
summary of the costs they have incurred and illustrations of unarranged overdraft scenarios to help people understand just how much it will cost them to borrow without permission.

They should also enable customers to opt out easily from unauthorised overdrafts if they want to. All these measures should be introduced as soon as possible. Until the banks adopt these new practices, we are all in danger of paying over the odds.

Jill Insley is head of the consumer team at the Guardian and Observer newspapers

This article is taken from the New Statesman supplement Held To Account: What's next for UK Banking? sponsored by Barclays