Millions of consumers were dealt a crushing blow last week when the Supreme Court ruled in favour of the banks in the legal battle between the Office of Fair Trading (OFT) and eight high street banking institutions over the issue of unfair charges.
The UK's banks will have breathed a collective sigh of relief when the Court ruled that unarranged overdraft charges are not governed by fairness, under Regulation 6 of the Unfair Terms in Consumer Contracts Regulation of 1999 (UTCCR). With no legal leg to stand on, the OFT will struggle to continue in its separate investigation into the issue. Consumers are still free to pursue banks through the courts themselves, but with the OFT thwarted, any chance of success is, in effect, destroyed and hopes for remuneration of as much as £20bn in overdraft fees have been dashed.
"Not only does this give banks licence to charge what they like for unauthorised overdrafts, but it could have ramifications for other areas of personal finance," says Peter Vicary-Smith, the chief executive of consumer group Which?.
However, despite the obvious setback, consumers are being told there could be some light at the end of the tunnel. Political pressure on the banks is still firm with Liberal Democrat leader Nick Clegg responding to the ruling by demanding changes to the law. "Regardless of the legal position, it simply isn't right that someone on a low income should pay £25 or more to their bank just because they're overdrawn by a pound or two," he says. "The only way to protect millions of customers from being ripped off by their banks is to change the law."
More importantly, in the Supreme Court's judgment itself there were hints of a window of opportunity for the OFT to pursue the case further. Although all five Justices decreed that the charges cannot be assessed for fairness under Regulation 6 of the UTCCR, they said that there may be scope for the OFT to assess them on other grounds, notably under Regulation 5.
This regulation states that a contract can be regarded as unfair if it has not been "individually negotiated" and goes on to cause a "significant imbalance in the parties' rights and obligations arising under the contract". This means there is a chance that the OFT could use this clause to reignite its legal case against the banks because it does seem to offer some protection against costs which are disproportionately imposed on overdrawn customers to pay for an otherwise free banking system for everyone else. "I don't think this has finished at all. All those people with their claims stacked up on hold shouldn't give up hope yet," says Mr Gander.
If the OFT does decide to take this route, however, it may take a long time to get under way. For now, the OFT has said only that it will announce next month its final decision on whether to continue the investigation. Until then, consumers are being urged to do what they can to fight excessive bank charges by making sure they have the best current account.
"People should wake up to the fact that they don't have to stay with the same current account and should not be afraid to switch to get a better deal," says David Black, a banking special
ist at analysts Defaqto. Only about 6 per cent of people switch their current accounts every year, but for those who often find themselves overdrawn, having the wrong account can be a costly mistake. Clydesdale charges 18.85 per cent on authorised overdrafts and an eye-watering 29.99 per cent on unauthorised overdrafts. Going overdrawn without permission costs Clydesdale customers £25 a month, an extra £25 each time the overdraft increases and £35 for every bounced payment, in addition to paying the high rate of interest.
Anyone who uses an overdraft, even if only on occasion, must focus their attention on finding the cheapest overdraft rate. Spanish banking group Santander, which owns Abbey and Bradford & Bingley, made waves last week when it introduced the fee-free Zero account, due to be launched in January. Instead of being charged penalty fees for going into the red, Zero account holders will pay a flat interest rate of 12.9 per cent both on authorised and unauthorised overdrafts. Unfortunately, this is available only to current and new mortgage holders, so if a better mortgage deal can be found elsewhere, this will easily outweigh any benefits from the fee-free account.
Other accounts worth considering are the Premier and Premier Direct current accounts from Alliance & Leicester which set no overdraft charges for the first 12 months, then 50p per day up to a maximum of £5 per month. However, be warned that customers who breach the authorised overdraft limits will still be punished with penalty fees of £5 per day, up to a maximum of £100.
The key to making the most of a current account is to find one that suits the banking needs of the holder. Those who never use an overdraft and are always in the black should concentrate on finding generous in-credit rates.
"If you regularly keep a credit balance then opt for an account paying a competitive rate of credit interest," says Michelle Slade from financial comparison site Moneyfacts.co.uk. "Currently both the Alliance & Leicester, Premier Direct Current and the Abbey Current Account pay 6 per cent AER on balances up to £2,500."
Packaged accounts, which levy a monthly fee in exchange for a range of benefits such as travel insurance and breakdown cover, are another option. These accounts do come with a warning, though; anyone unlikely to make the most of all the extras is probably better off with a standard current account.
"Some accounts charge as much as £25 per month, so to make sure the account is cost effective you need to ensure you fully use the benefits," adds Ms Slade.