FSA could 'force banks to return penalty charges'

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The Independent Online

Banks may be forced to hand back billions of pounds to current account customers if they lose a landmark High Court case on charges next year.

Britain's regulator, the Financial Services Authority, has told The Independent it might consider ordering banks and building societies to automatically refund penalty fees to current account customers.

That would generate a windfall of thousands of pounds to individuals, some of whom may not even be aware that they have been overcharged. The disclosure is the latest twist in the two-year public revolt against leading financial institutions which has seen banks besieged by tens of thousands of complaints and court cases.

The big five clearing banks have paid out more than £400m in refunds this year and the total in the past six years may have been as high as £2.6bn according to one poll.

The Independent has been supporting the campaign against excessive charges for unauthorised borrowing, which are applied when customers breach their overdraft limit or bounce a cheque. The charges of up to £38 a time are thought to be illegal because they break the 1999 Unfair Terms in Consumer Contracts Regulations. The law states that punitive fees should be no higher than costs.

The banking industry insists the charges are legally justifiable because they are "service charges" rather than penalty fees and so do not fall under the terms of the regulations. They also say that lowering or capping the charges could end "free" banking enjoyed by millions of customers.

Under a deal announced in July, the Office of Fair Trading and eight leading financial providers are asking the High Court to rule in January whether the legislation applies to the charges. If it does, the OFT will then decide whether it can reach agreement with the banks on the charges.

The Independent asked the FSA whether, should the banks lose the case, it would order banks to automatically refund past charges to all customers. A spokeswoman replied: "If the court decides that past charges were unfair, the FSA ... could decide whether it was appropriate to look at consumer redress."

Martin Lewis, who runs the website moneysavingexpert.com, said: "I think it [the FSA statement] is very interesting. There's growing public pressure that we need to see something out of this." The e-petition to Downing Street on bank charges already has 60,000 signatures.

Banks made record profits of £40bn last year, but any such compensation could be hugely expensive. The OFT says banks make between £2bn and £3.5bn from unauthorised borrowing fees. If they were forced to pay out charges for the claim period in the courts, six years, banks could end up paying out £16bn.

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