Regulator raps banks which close disgruntled customers' accounts

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Britain's biggest banks are behaving unfairly and unreasonably in closing the accounts of customers who have challenged potentially illegal bank charges, a City regulator has ruled.

The Financial Ombudsman Service (FOS), an independent arbitration service, this weekend ordered Alliance & Leicester to compensate a customer whose account it had closed. The bank has a policy of closing the accounts of customers who take legal action against it, but the FOS said customers had the right to complain without facing such punitive action.

The case follows a huge increase in the number of bank customers complaining about overdraft fees and charges for bounced cheques since an Office of Fair Trading ruling last year that similar penalties in the credit card industry were illegal.

Although the OFT has not yet ruled on test cases in the banking sector, it is widely expected to say later this year that any bank which charges more than £12 when a customer goes into unauthorised overdraft or bounces a cheque is breaking the law.

Before the ruling, thousands of customers have demanded their banks refund such charges, which can be as high as £40, and in many cases begun legal proceedings against them. However, several leading banks have fought back by agreeing to refund the charges but then closing the accounts of customers who have taken legal action.

While the FOS refuses to comment publicly on individual cases, it is understood that it has ordered A&L to compensate the customer who complained about his account being closed, rather than to reopen the account.

Tony Boorman, the FOS's principal ombudsman, told BBC Radio 4's MoneyBox programme he was concerned banks were trying to punish customers for challenging their practices. "We strongly believe customers have a right to complain," he said. "I would be concerned about any financial institution which stood in the way of this and took action to actively discourage people from complaining."

A spokesman for Alliance & Leicester said it had accepted the Ombudsman's ruling. "We never prevent customers from complaining," he said. "We only ever close accounts when it has become clear we cannot offer what the customer wants."

The FOS's decision to speak out follows a report by Which?, the consumer group, that accused banks of using a string of dirty tricks to curb complaints about charges. In addition to closing the accounts of customers who complain, some banks have been overcharging customers who request old copies of statements, which they need to check previous charges, Which? said. In other cases, customers have found themselves pursued by debt collectors.

Doug Taylor, a personal finance campaigner at Which?, said: "In an attempt to avoid paying consumers what they are due, we have found that banks are employing increasingly underhand methods to avoid their responsibility to treat their customers fairly and refund the charges."

Which? said more than 150,000 people had downloaded a guide to reclaiming illegal bank charges published on its internet site. The group estimates banks collectively made more than £4.5bn from the charges last year. But leading banks insist they have a right to close the accounts of customers with whom they believe a working relationship has irretrievably broken down.