Jeremy Warner's Outlook: OFT retreats on battle over penalty charges, but war on bank profits is far from over

Lights, camera, action... or not, in the case of John Fingleton's planned assault on the dastardly banks for the apparently iniquitous level of overdraft charges. The Office of Fair Trading chief executive had been planning to cap these current account charges rather in the way he already has for credit cards, but yesterday he unexpectedly changed tack and, instead of declaring the penalty charges illegal, ordered an in-depth study of bank pricing in general.

Consumer organisations immediately accused him of a cop out, of caving into the implied threat from bankers to axe "free" banking if they are forced to cap unauthorised overdraft charges. Yet the big banks would be unwise to crow. This is not really a retreat, but more of a regrouping for what may eventually be a much more serious assault on alleged profiteering in the retail banking market.

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As Mr Fingleton has correctly surmised, there is not much point in clamping down on "hidden" overdraft charges if under the water-bed principle banks only compensate by raising charges elsewhere. The vast majority of current account holders keep their affairs in order and therefore pay no charges. They are hardly going to thank Mr Fingleton if action to protect the profligate from their own recklessness leads to the imposition of charges on ATM cash withdrawals, direct debits, and so on.

This is difficult territory where the law of unintended consequences could quite quickly establish itself if the OFT acts precipitously. According to Which?, the banks collectively generate £4.7bn a year in revenues from penalty charges on unauthorised overdrafts.

City estimates put it at much less. Knock off administrative costs and the relatively high bad debt provisions that have to be made against such borrowers, and the net addition to banking profits may be quite small. The banks may have been quite willing to sacrifice these profits if it enabled them to introduce like some kind of Trojan horse a more generalised charging regime.

Penalty charges are, in any case, a comparatively minor component of any "excess" in profits which is being made in retail banking. The much bigger iniquity is the credit interest that banks make out of those who do keep their accounts in order. According to HBOS, the average current account balance is about £2,000. Many never go into overdraft at all. This provides the banks with a massive float of "free" money. In a period of rising interest rates, such as we have at present, it becomes particularly profitable.

Most current accounts pay only marginal rates of interest. Even with those that pay like a savings account, the terms tend to be so hedged around with conditions and limits that they are hardly worth the bother. The banks may have won the battle with the OFT, but if this huge, soft underbelly of profitability becomes the eventual target, they'll certainly lose the war.

Lloyd's of London's record profits

Lord Levene, chairman of Lloyd's of London, plainly doesn't believe in resting on his laurels. No sooner had he announced record profits of £3.7bn for this once bombed out insurance market than he was warning that climate change was causing an increase in the number and severity of natural catastrophes and that it would therefore be unrealistic to expect claims experience to be as benign as it was last year.

The year before, there had been a worryingly high number of extraordinarily destructive hurricanes, resulting in a £103m loss. Insurers need the occasional year of plenty to make up for what may be a growing preponderance of famine years. The point Lord Levene wants to get across is that just because insurers are making record profits doesn't mean they have to accept a corresponding reduction in premiums.

Sensible, level-headed stuff. The problem he's got is that he doesn't really call the shots in a market made up of a myriad of different underwriters and brokers. Lloyd's has more control over the underwriting standards of its members than it used to, but given the amount of capital which has flowed back into this industry over the past year, apparently oblivious to the history of boom and bust, it may have something of a job in preventing a return to reckless ways.

Insurance has always been a classically cyclical industry. A few decent years encourages a flood of new capital. As the competition grows, the premiums fall and underwriting standards collapse with them. As in 2005, there's eventually a really bad year for catastrophe, and everyone loses their shirt. The cycle then begins afresh with low capacity and rising premiums until profits reach a level when all and sundry think they'll try and grab a bit of the action too. The encouraging thing about Lloyd's is that actually it wasn't wiped out in 2005, despite what was far and away a record year for claims.

With another exceptionally good year under their belts, insurers are again struggling to hold the line on premiums. The temptation to forget the underwriting profit and hope the investment income will carry you through is once more becoming difficult to resist.

With business walking out the door, it becomes ever more difficult to stick to the mantra of profit, not market share. If Lord Levene is right, and global warming does prompt a growing incidence of catastrophic loss, then eventually only the big boys will be left as players and the business may indeed become less cyclical. But we are not there yet.

Gambling law is a shambles

Only a few days ago, Tessa Jowell, the Culture Secretary, said that there was no plan B if the House of Lords voted against an order giving the go-ahead to 17 new casinos including the proposed supercasino in Manchester. Ever the optimist, she declared last night the plans "very much alive", despite their much predicted defeat.

Well here's hoping the Lords have finally put paid to the whole hopeless muddle of the new gaming legislation. Britain has one of the lowest levels of problem gambling anywhere in the world even though for most purposes its existing gambling laws are relatively liberal. Ms Jowell proposes to replace a legal framework that has functioned perfectly well for more than forty years with a new one that pretends to modernise the law in a way that will both create jobs and address the reality of fast globalising gaming markets.

In fact, the new law does nothing of the sort. The starting point was reasonable enough. As in most industries, globalisation and technology is turning gaming on its head. The internet means it no longer has to be physical or location specific. Instead, it can be offered remotely from offshore centres, which in turn has made gambling increasingly difficult both to regulate and to tax.

There is nothing governments hate more than an industry that can neither be regulated nor taxed. The intention of the legislation, then, is both to bring about a bigger physical gaming industry in the UK and to make Britain a more attractive location for remote gaming operators.

On both counts it seems to be failing. An eclectic mix of different interests has come together to oppose the proposed expansion in physical gaming. Meanwhile the Chancellor, who morally is almost certainly against any expansion of the industry at all, proposes to set the rate of tax on the new casinos at a punishing 50 per cent. If any remote gambling operation was thinking of relocating to the UK, he's also put the kibosh on that by imposing a relatively high rate of remote gambling duty too.

On almost every front the new legislation manages to be vague, confusing, open to interpretation and demanding all at the same time. In attempting to expand the industry, the Government has only succeeded in heaping yet more rules and regulations on hapless participants in an attempt to "protect" the public from its own descent into vice. What a mess.

j.warner@independent.co.uk