OFT cracks down on 'illegal' penalty fees on credit cards

Credit card lenders have been illegally taking more than £300m a year from customers in late payment charges and other penalty fees, the Office of Fair Trading ruled yesterday.

The regulator gave the industry until the end of next month to respond to its proposal to limit all such charges to a maximum of £12, less than a third of the penalties currently levied by many leading lenders.

The ruling follows a series of court cases in which credit card borrowers and bank customers have successfully challenged the level of late payment fees they have been charged.

Consumer protection laws prevent lenders charging more than the actual costs they have incurred when processing late payments or credit limit breaches. But credit card lenders have routinely charged £20 or more for customers who miss repayment deadlines on their accounts, or go over their credit limits.

Abbey and Alliance & Leicester charge £25 for such failures, for example, while Barclaycard, the UK's biggest credit card lender, charges £20.

John Fingleton, the chief executive of the OFT, said the regulator believed charges of this magnitude were illegal. "We expect credit card issuers to adjust their default levels quickly," he said. "We have not ruled out future legal action if the market does not respond positively."

The regulator said it would impose a new threshold on the credit card industry, where all penalty fees in excess of £12 would be assumed to be unfair. The OFT also warned that even charges set at or below this cap would not necessarily be legal.

In addition, the regulator warned the same principles would apply to bank charges, though it has yet to formally set a cap for this sector, where penalty fees for unauthorised overdrafts and bounced cheques tend to be even higher. Lloyds TSB, for example, charges £30 a day for unauthorised overdrafts, while Halifax charges £30 every time a customer tries to process a transaction for which he or she does not have sufficient funds.

Consumer groups were triumphant after the ruling. Emma Bandey, of Which?, said: "The OFT has finally officially acknowledged what Which? has been saying for years - that credit card companies have been fleecing their customers with unfair, sky-high charges."

Sue Edwards, of Citizens Advice, added: "Our service helped people with more than a million debt problems last year and a large proportion of those people will have seen their debt increased by late payment charges."

However, Apacs, the credit card lenders group, said the ruling was not yet binding. "The OFT has based its conclusions on information from just eight card companies," Paul Smee, the Apacs chief executive, said. "Every individual card company will now have to consider whether it agrees with the OFT's interpretation and whether the way in which its own charges are calculated is in line with the OFT's approach."

Implementation of the ruling is likely to have a significant impact on credit card lenders' profits. Even the lowest-charging credit card lenders, including HSBC and Royal Bank of Scotland, have fees above the £12 threshold.

Stephen Hone, student, 29: 'Abbey's fee wiped out money to help my kids'

Stephen Hone, a law student from Plymouth, won £5,000 compensation from Abbey after taking it to court over two £35 charges he incurred when direct debits, due to be paid from his account, bounced.

Mr Hone told a Plymouth court the charges breached the 1999 Consumer Contracts Regulations because they were substantially greater than the costs the bank could have incurred when dealing with the problem.

"The money may not seem a big deal to Abbey, but when it charged me £70, the only money I had to support my children was £70 a week from a part-time job, which was wiped out," he said.

After Abbey failed to file a defence at an initial hearing in February, it offered Mr Hone an out-of-court settlement of £5,000. "These charges hit people living on the breadline," Mr Hone said. "I felt it was important to take a stand."