The bad news for bank customers

Martin Hickman guides you through the Office of Fair Trading's decision on bank charges

1) What did the OFT announce today?

The OFT says it won’t mount another legal challenge against the banks over unauthorised borrowing fees for current accounts, following its defeat against six banks and one building society at the Supreme Court last month.

2) Why did the OFT throw in the towel?

The watchdog says another legal challenge would probably fail because any court would use the reasoning handed down by the highest court of the land, that the charges cannot be assessed for fairness under the 1999 Unfair Terms in Consumer Contracts Regulations (UTCCR).

3) Is that very bad news for customers seeking refunds?

Yes, very bad news. The OFT’s legal challenge had been going on for two and half years and had won two cases - at the High Court and Appeal Court - and was the best chance of securing a legal victory against the banks.

4) So is the big consumer revolt against the charges over?

No. There are several chinks of light in the gloom of the OFT’s decision.

5) Are the banks going to lower charges?

Perhaps. The OFT says it will talk to the banks about lowering the charges over the next few weeks and will report its progress in March. The OFT has reminded the banks that the Government has threatened to legislate to resolve the charges unless banks act. The Consumer Affairs Minister, Kevin Brennan, underlined this threat in The Independent today. The Conservatives and Liberal Democrats are also aware of the electoral appeal of standing up for bank customers.

6) What are the other possibilities?

The OFT said that a legal challenge against the banks by an individual might succeed, because it would revolve around individual contracts and circumstances rather than generalities. The Supreme Court hinted that action against the banks might be possible under Regulation 5, rather than Regulation 6, which the OFT used. Regulation 5 states that charges should “not cause a significant imbalance to the detriment of the consumer.” Customers who pay fees cross-subsidise ‘free banking’ for customers in credit. This might be a "significant imbalance to the detriment of the customer”. Another challenge may be possible under the Consumer Credit Act, which states that banks must behave fairly.

7) What will happen to the one million claims on hold with the banks?

The banks are likely to start writing to customers rejecting those claims, citing the Supreme Court ruling.

8) Is there anything those million customers can do?

They could exercise their right to complain about their treatment – the rejection of their claims for refunds – by complaining to the Financial Ombudsman Service (FOS). FOS is a free and speedy service, but complainants must go through the complaints procedure of their bank first. It is the intention of Martin Lewis’s Moneysavingexpert site to publish template letters for the making of such claims to FOS in January.

9) Can the banks reclaim the refunds they have given?

No. The payments were discretionary. Financial providers never accepted liability, but paid out the sums as a gesture of goodwill.

10) Has the bank charges revolt failed?

The banks will feel that they have won by preventing mass payouts that would have run into billions of pounds. They have had their case upheld by the highest court in the land and their adversary, the OFT, has admitted defeat (in the test case at least). In this sense, the banks can be regarded as winners of the legal action.

But arguably customers have won the wider battle. Around £1bn was paid out in refunds before the launch of the OFT test case in July 2007 suspended individual action. Since then many banks have reduced their charges. Talks between the OFT and the banks may reduce them further. Individual litigants may yet prosper in the courts.

Had there not been a consumer revolt, the biggest for at least 20 years, none of this would have happened. Customers who have borrowed money without permission are, generally, better off than they would have been. For those who carefully manage their accounts never incurring charges, the picture is less clear. To make up for the loss of some fee income, banks are seeking to levy monthly charges on current accounts. Whether it was ever right for these generally wealthier customers to enjoy ‘free banking’ subsidised by generally poorer customers is another question. The worst off (and/or the feckless) are a bit better offer as a result of the bank charges revolt.