Banks on the back foot over overdrafts
Financial Times
Published: April 24 2008 19:43
UK high-street banks were in the dock on Thursday over the charges they impose on customers. The ruling by the High Court was the latest skirmish in a lengthy battle about regulators¹ powers to examine whether unauthorised overdraft fees are unfair. The judgment comes in a test case brought by the Office of Fair Trading against eight of the largest current account providers. It concluded that unarranged overdraft fees some of which have been set at almost £40 could be assessed by the watchdog.
The ruling brings some welcome order into a complex legal area that has spawned thousands of court cases brought by individual consumers. The decision will also come as a relief to a beleaguered OFT: the watchdog spent Wednesday defending its crackdown on cartels after settling a libel action and paying damages to a supermarket chain.
There are many reasons why bank overdraft charges arouse public anger. Even though the High Court found that they were largely set out in plain language, they are still quite difficult for consumers to focus on and understand. It seems unfair that a bank¹s charges for exceeding an authorised overdraft limit make managing money more difficult for those already struggling to get their finances under control. And by the time consumers are facing such charges, their financial difficulties mean they are likely to find it harder to switch accounts.
Financial institutions are estimated to take in £3.5bn a year for unauthorised overdraft fees and the like. No wonder the banks value this source of revenue.
Instead, the starting point for setting unauthorised overdraft charges should be the underlying cost of running such accounts. They should not be used to cross-subsidise the vast mass of customers who do not pay them. Of course, banks can set their charges at levels that underline that feckless borrowing is not a costless activity. But if they really want to deter customers from going beyond their limits then the obvious remedy is not to allow them unauthorised overdrafts at all.
If unauthorised overdraft charges are not to be the revenue raiser they have been to date, then the banks are bound to look elsewhere. One idea is current account charges. But competitive pressures would militate against this.
The broader concern is that competition in personal banking does not work well. Customers themselves have a duty to use their powers to switch between banks and reward those with better deals. For their part, banks must improve how they serve departing customers. We still have a long way to go.
Copyright The Financial Times Limited 2008