The Great Overdraft Swindle

Introduction

This article discusses the emotive topic of overdraft bank charges in the Britain. It discusses current legislation and the work that the regulators, like the Financial Ombudsman and Office of Fair Trading (OFT), are doing to create a level and fair charging platform in the UK. The article is probably also useful for consumers looking at making a claim for unfair overdraft charges.

The Background to Overdraft Charges

Bank customers who complain about unfair charges are getting near perfect levels of compensation and the Financial Ombudsman Service has so far upheld all cases of consumer complaints against the high street banks. To avoid costly court cases and potential embarrassment, there is a growing sign that banks are willing to settle claims.

During the summer of 2006 there has been a surge in complaints about fees related to overdrafts. In the six months from March-September 2006 the Ombudsman had received well over 1000 criticisms about fees and charges. Most letters sent by annoyed customers concern bank charges for bouncing a cheque or going overdrawn.
The Ombudsman says that it prefers to deal with claims in an informal manner. Although it has helped to negotiate settlements it has found satisfactory conclusions for both sides without having to escalate matters or make an official ruling. The Financial Ombudsman has indicated that Customers' new level of awareness stems from the publicity the Finance Sector Regulators generated recently when they questioned whether these sort and levels of penalty were appropriate. Nearly every day of the week the UK newspapers are covering stories about "unfair" bank charges

While the leading trade group for the banking industry defends these charges as "fair", it also says the industry is facing pressure to settle complaints as a means to avoid court cases.

In September 2006 the OFT said it would investigate the penalty banks charge customers who go over drawn. The regulator has asked banks to justify the penalty charges on overdrafts and mortgages and will spend up until the end of 2006 on a fact finding exercise with the British Bankers Association (BBA) and the Financial Services Authority (FSA) before deciding whether to open a more detailed enquiry. The move follows its investigation earlier this year into credit card penalties, which it concluded were "unfair" to consumers. This resulted in most of the largest Credit Card issuers cutting penalty charges to an average of 12 from an average of over 22. In April 2006 the OFT said that the same principles should apply to overdrafts, which has started alarm bells to ring with the banks. There is an obvious consensus that their profits could be greatly dented and it is estimated that the banks make around 4.65 billion from overdraft fees and associated charges.

Some banks have signalled that regulation of overdraft charges and their subsequent drop could bring an end to free banking. This also comes on top of imminent regulation to come out of the FSA, OFT and Competition Commission's investigation into Payment Protection Insurance (PPI), which is also forecast to cost the banks a similar sum in lost profits. Retribution by the Financial Ombudsman is decided after customers banking histories are examined and negotiations take place with banks. In many cases banks have agreed to repay from 50 to 100 per cent of the disputed charges. Recently many banks raised their penalty charges with some charging up to 30 a day for unauthorised withdrawals and payments. It is felt in some quarters that this has been a way for the Banks to recoup the repayments they have been more or less forced to repay.

The Financial Ombudsman in some cases has looked into the history of people's bank accounts prior to making a decision. So in cases where someone has drawn on three separate payments over the top of their overdraft limit the Ombudsman sometimes suggests that consumers take responsibility for their actions.

As of October 2007, complaints by consumers are continuing to rise and the Banking Code Standards Board, which operates a voluntary code of practice for the industry, indicated it had received well over two thousand complaints and queries in the year ending March 31 2006, this is compared to only eighteen hundred in the previous year.

Conclusion

With the Financial Ombudsman having a near 100% track record of siding in favour of the complainant it is more or less a "given" that the authorities will deem the charges to be "unfair". The OFT pressurised by work in other areas is likely to either make a recommendation that Banks reduce their charges or may even refer the Banks to the Competition Commission. However, any reduction in the banks profits is likely to see them clawing back the profits in other areas. A more visible cost like bank charges will probably not happen, but we are more likely to see a stealth rise in the underlying interest rates on secured loans, mortgages, credit cards and unsecured loans. If your Bank has recently charged you, with the authorities on your side it is now the perfect time to claim back those charges.