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Western EuropeApril 1 2007

‘Fair’ penalties could threaten free banking

If British banks are forced to cut the penalties they charge on current accounts, there is a danger that they will make up the shortfall elsewhere, writes Michael Imeson.
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What is it?

Penalty fees levied by British banks on their personal customers for unauthorised overdrafts and unpaid direct debits and standing orders could be capped by the competition authorities. If so, it will cost the industry hundreds of millions of pounds a year.The penalty for an unauthorised overdraft on a current account is typically £25 to £40. It could be cut to £12.

Who dreamed it up?

The Office of Fair Trading (OFT), the UK’s consumer and competition authority, began an investigation last September into whether overdraft and other penalty charges are fair. It is expected to report its findings in March or April.

The OFT has been spurred on by widespread consumer unrest. Organisations including Which? and the Consumer Action Group are leading the revolt.

Last year, the OFT applied similar brute force to credit card issuers, accusing them of charging credit cardholders too much for missed payments. It stipulated that £12 should be the maximum charge.

What are its main provisions?

These will be outlined in the report. If the ruling on credit card default charges is anything to go by, banks will probably have to:

  • recalculate their default charges in line with the OFT’s principles;
  • comply within two months;
  • submit to an OFT investigation if the fee exceeds the threshold.

 

What’s in the small print?

This will be in the report. For credit cards, the OFT says “a default charge is not fair simply because it is below £12”. Banks could be censured even if they charge less than the maximum.

What does the industry say?

“We have explained to the OFT that an overdraft fee is a fee for a credit service, albeit one the customer has not asked for – but they have taken the money,” says a BBA spokeswoman. “The fee isn’t purely for generating a letter telling the customer they have gone overdrawn or over their limit. It’s also to cover the behind-the-scenes credit assessment as to whether the payment that pushes the account into overdraft, or increases an existing overdraft, should be honoured or rejected.”

How much will it cost?

Consumer group Which? estimates the figure for unfair fees to be £4.7bn. A more credible estimate is provided by Credit Suisse analysts, who have calculated that the banking sector could lose about £500m a year if the OFT caps penalty fees. The OFT estimates that when it reduced credit card penalties it saved consumers (and lost credit companies) £300m a year.

What do the regulators say?

OFT executive director Jonathan May says the investigation is being carried out “to protect consumers from unfair penalties that recover more than the cost of dealing with the default”.

The law of unintended consequences

Forcing banks to cut penalty charges will drive some, though not all, to end “free banking if in credit” to recoup their losses. Britain is the only country in the world where free banking on a mass scale is available. If this ended because of OFT action, it would be a supreme irony. Not only would the prudent end up paying regular bank charges, so too would the imprudent and impecunious – whatever they saved on penalty fees they would lose in regular charges.

Could we live without it?

Yes.

Rating: 2

Rating scale:

5 = Essential;4 = Useful; 3 = Neutral;2 = Unnecessary;1 = Waste of time.

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