As banks win on charges, are free accounts on the way out?
A few weeks ago I received a letter from a bank customer. He had just moved to the United States, but before he left he unknowingly went £5.39 overdrawn — without the bank's permission.
As soon as my correspondent realised his error, he paid £6 into his account and thought no more of it. Because he had moved, he did not receive bank statements or letters from the bank for a few weeks. When his correspondence caught up with him, he had a terrible shock.
My letter writer was charged £28 for initially going overdrawn — and then a sequence of further £28 penalty charges were imposed for failing to clear the overdraft, with extra charges on top. By the time his letters caught up with him, the bank customer faced a £362.59 bill — all for mistakenly going a fiver overdrawn.
Happily, the story for this individual ended happily. I contacted his bank — NatWest, a sister bank of Ulster Bank within the Government-rescued Royal Bank of Scotland group — and it credited his account with £363.20 to clear the penalty charges. That is the power of the Press.
But it is the frequency with which banks levy these very high levels of penalty charges — which in some cases rapidly escalate into the thousands of pounds — that has led to the confrontation between banks and the Office of Fair Trading. Surprisingly, this resulted last week in victory in the new Supreme Court for the banks.
I say surprisingly, because there was a widespread assumption — including within the banks — that the OFT would win. It looked an open-and-shut case. The banks had been accused of levying extortionate charges and few fair-minded people would regard these fees as justified. But the court ruled that whether or not they were fair, the OFT did not have the legal powers to act as it did — at least not doing so in the way that it did.
Don't go overdrawn
Ironically, banks have recently gone through a process of changing fee structures — probably in anticipation that the court case would go against them. Many of the most outrageous charges have been reduced. From last month, Ulster Bank cut some of its charges for unauthorised overdrafts by two-thirds. A bounced cheque or refused direct debit or standing order instruction that used to cost £30 per item, is now charged at £10 a time — to a maximum of £100 per month. The ‘paid referral fee' — where an item is paid, despite the account going overdrawn without authorisation — was cut from £30 per day to £15 per day.
Northern Bank's paid referral fee remains at £25, with a cap on charges at £75 per month. The bank says “we may choose not to charge a fee if the balance is only just beyond the arranged limit or has only just gone overdrawn”.
Where a cheque, direct debit or standing order is rejected because there are insufficient funds in the account, Northern's charge is £28 for each rejected item.
Bank of Ireland customers in Northern Ireland are charged £21 a time for a cheque, direct debit or standing order that is rejected. Customers who go more than £20 overdrawn without authorisation are charged £21 per month.
The highest charges for unpaid items among the Big Four Northern Ireland banks are levied by First Trust, which charges £35 per item. Where the bank chooses to pay an item which puts a customer into an unauthorised overdraft, the fee is £15 per day.
Even with many of the worst of the excessive unauthorised overdraft charges having been withdrawn, it remains very expensive to overdraw without permission. Although the OFT has lost the Supreme Court case, it may decide to proceed by way of other legal powers. The other avenue, which consumer groups are pursuing, is a change in the law. Antoinette McKeown, chief executive of Northern Ireland's Consumer Council, said: “(The) ruling is extremely disappointing. We will consider the judgment carefully and work with the OFT and our elected representatives to make sure that banks give their customers a fair deal. We believe it is now time for the Government to step in and take action to protect consumers.”
The banks themselves recognise that they probably need to ensure their charges are explicit, reasonable and generally understood by customers. Despite winning this legal case, the end may be in sight for excessive charges. But don't celebrate. In future, banks may move to other sources of revenue. Possibilities include annual current account fees; annual credit card fees; and charging for cash machine withdrawals. Many banks are likely to specify that banking is free only if customers maintain minimum balances. Just as there is no such thing as a free lunch, we may soon be saying there is no such thing as a free bank account.