David Prosser: This bank error is not in your favour
Wednesday 25 November 2009
Outlook So it is D-day for the banks, from whom an enormous weight could be lifted this morning, if the Supreme Court rules that the Office of Fair Trading has been exceeding its powers by investigating their unauthorised borrowing charges. At a stroke, such a ruling would end the campaign, lead by
The Independent, for compensation for millions of people overcharged since 2001.
What's more likely, however, is that the Supreme Court will uphold the judgements of two previous hearings in lower courts, both of which ruled that the OFT is well within its rights to look at whether the charges banks have levied when people exceed overdraft limits or bounce cheques broke the law. Since the OFT has been quietly continuing its investigation while waiting for this final ruling today, that could mean a verdict from the regulator within just a few weeks.
That verdict will no doubt be appealed too, but assuming today's ruling goes in consumers' favour, the banks will eventually have to accept they were wrong to levy the charges they did. It's a very basic bit of law that charges of this sort, levied if a customer breaches a contract, should only cover a company's costs and not be set at levels designed to produce profits. No bank is going to be able to show that it incurred a cost of £35 each time a customer went over their agreed overdraft limit.
Don't think, however, that the banking industry will just swallow this bitter pill. The OFT reckons banks were making £2.6bn a year from these charges before the scandal blew up in 2006. In the credit card industry, where the same row was settled much more quickly two years ago, the OFT has said lenders should not charge unauthorised borrowing fees of more than £12. Were that model to be applied to the banks, they would be giving up around £1.7bn of annual revenue (while simultaneously facing a separate demand for compensation from millions of overcharged customers).
Some of the more dramatic claims there have been about this affair spelling the end to free banking are wide of the mark. It's difficult to imagine Britons being prepared to pay US-style fees for cash withdrawals or standing orders, say. That would be to turn back time.
Still, you can expect to see more and more current accounts that come with monthly charges – and ever greater effort from the banks to move us all into these products and services.
Indeed, that trend is already well under way. Personal finance specialist Moneynet says that of 82 current accounts now available in Britain, 37 (or 45 per cent) charge a fee. That compares to 24 out of 72 accounts (33 per cent) three years ago. Banks haven't simply been slapping charges on existing products, but launching new current account services that come with a fee justified by bells and whistles attached to the deal – free travel insurance, say, or the offer of more attractive interest rates on savings products.
Moneynet points out that with 54 million active current accounts in the UK, charging a monthly fee of £2.50 on each one would enable the banks to recoup almost all of their lost £1.7bn of unauthorised borrowing fee revenue. That's not going to happen overnight, but were the banks to shift, say, a quarter of current account customers to products with a £5 monthly fee, the industry would be halfway towards funding the shortfall.
Expect other gimmicks too. Some banks have already warned they will charge customers who don't use their accounts regularly, or fail to put more than a minimum amount through the account each month. Others, such as Santander, are promising to maintain free banking for customers who also have a mortgage with them (though there's nothing to stop them charging just a fraction extra for lending).
Moreover, new fees aren't the only way for the banks to turn an extra coin or two. Existing charges can also be raised. The consumer group Which? pointed out earlier this week that the cost of authorised overdrafts has increased significantly this year, with many banks raising the interest rates they charge on such borrowing, despite the fact that the Bank of England's base rate has fallen so dramatically. Mortgage rates also seem to be rising too.
To put all this another way, it won't be the banks that suffer following a crackdown on borrowing charges, but their customers – including many who never paid the unfair fees because they always stayed in credit, or at least within their agreed overdraft limits.
A business model that saw customers who broke the rules illegally charged in order to subsidise those who didn't is obviously wrong, but that may be no consolation to customers in the latter group.
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