Guardian: At last customers are fighting back against the £3bn a year that banks are raking in from fees for going over an overdraft limit.

Cover story Bank penalties making us see red

At last customers are fighting back against the £3bn a year that banks are raking in from fees for going over an overdraft limit. Tony Levene reports

Saturday October 29, 2005 The Guardian

Have you been stung by exorbitant bank charges after going just a few pounds into the red? You're not alone - banks rake in an estimated £3bn a year from fees such as £38 for a bounced cheque and £25 each day an account is over its authorised limit. But do you really have to pay these charges? Take the case of Dave Smith. He fought charges just short of £1,500 imposed by Abbey National - and the bank settled almost at the door of the court. Abbey wanted to keep the payout quiet - it asked Mr Smith for a confidentiality agreement, but he refused. Can you repeat Mr Smith's success? The evidence is, persistence pays.

According to bankchargeshell.co.uk a website devoted to the fightback against penalty charges, consumers have won overdraft charge fights against banks such as Alliance & Leicester, Yorkshire Bank, Intelligent Finance and LloydsTSB. RBS and Halifax have paid up on credit card claims.

Customers have to be prepared to fight, often for months. But banks appear reluctant to test the legality of their penalties in the legal arena, usually settling in full just before the case is due for hearing.

Many individuals have threatened legal action against the banks after Guardian Money's Richard Colbey, a barrister, first exposed in October

2004 that the legal foundation for credit card penalties was built on sand.

The crux of the argument is that banks have no rights under law to impose penalties on customers in excess of the underlying cost of the overdraft or handling a bounced cheque.

Brian Egerton of Truro, Cornwall, is one of the prime movers behind the site. He says: "Banks are blatantly overcharging and their legal departments must know this.

"We have bombarded the Office of Fair Trading with chapter and verse on how the banks pay up when threatened with legal action. Banks apply charges that are, admittedly, written into contracts with their customers, but these, we believe are unenforcable under common law."

The OFT has begun an investigation into what it calls "disproportionately high" default charges on credit cards -typically a £25 penalty for missing a payment - and the credit card companies are fighting it tooth and nail.

If the OFT orders the credit card companies to cut late payment charges, it is almost inevitable that banks will be forced to cut excessive overdraft and bounced cheque fees.

The banks claim their fees are "a reflection of their costs", even though critics say they are automatically generated, often with no warning.

Other banks say the charges are important for customer discipline. Nationwide says: "Part of the fees are a disincentive, a discouragement against unauthorised borrowing."

But the OFT has warned banks that it believes default penalties are unfair if they "cause a significant imbalance in the rights of the parties to the detriment of the consumer."

The OFT's contract regulation unit says the credit card probe "will settle the principles under discussion".

The OFT says its investigation will take "as long as it needs" as there is no statutory time limit.

In the meantime, here are some legal cases from bankchargeshell.co.uk to cite when arguing against penalties.

Wilson v Love (1896) - established that a charge was a penalty if it did not relate to the true cost of an item.

Dunlop Pneumatic Tyre v New Garage and Motor (1915) - described a penalty as "greater than the greatest loss that could be suffered from the breach of contract." Charges should not be "extravagant and unconscionable".

Bridge v Campbell Discount (1962) - court held sums payable under a contract to cancel a hire purchase deal were excessive and unenforcable.

Murray v Leisureplay (2004) - court decided Mr Murray's contract, which promised three years' severance pay, was a "penalty clause" which could not be enforced.

"These charges hit the most vulnerable including those with physical or mental disabilities and those on fixed incomes.

"They are plunged into deep despair," says John Wood at Citizens Advice in St Austell, Cornwall. "Once these penalties start to bite, it is often very tough to get back into the black. Banks don't listen until we threaten to go to court."

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Reply to
kuacou241
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Inconsistency alert! Just a few pounds into the red does not describe someone going over their overdraft limit!

Reply to
Biscit

It does if there is no overdraft agreement in place, and the "authorised limit" is therefore zero.

Reply to
Ronald Raygun

In message , Biscit writes

It does in my case!!

Reply to
Richard Faulkner

"Ronald Raygun" wrote

If there is no overdraft agreement, then there is no "overdraft limit". [The limit of zero is not their "overdraft" limit, it is their "borrowing" limit...]

How can they possibly "go over their overdraft limit" when it does not exist? ;-)

Reply to
Tim

Bullshit. An overdraft limit is the amount a bank has agreed it will let the account go overdrawn without growling. In the absence of such agreement, that limit is usually zero, but it always exists, since there is a lways a point at which the bank will growl.

Bullshit. If a bank decides to pay a cheque or order which would result in the account going overdrawn, it is ipso facto permitting borrowing. So clearly the borrowing limit is not zero.

If it didn't, they couldn't, but it does, so they can.

Reply to
Ronald Raygun

Wasn't this all covered on Friday's working lunch?

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Reply to
davidof

The word 'overdraft' isn't used by banks internally, just the word 'limit'.

So the Boss would shout "Hey Boyle! Whats Raygun R.'s limit?"

To which I would reply (after having heaved his huge file from the filling cabinet to which a whole drawer was devoted to the chap (he writes very long letters about how the bank calculates its interest which the Boss doesnt understand and to which I have to reply)) and would reply "Its NIL Mr Snodgrass".

So the concept of a NIL limit does exist.

Before the days of the CCA and Ann Robinson and the bloody Consumer Association and Watchdog and Auntie Blair and the FSA and er,,, Banks would often allow overdrafts without a formal agreement and without a formal 'limit' being in place. In fact a NIL limit would be explicitly marked on an account which meant "Definitely no overdraft at all without exception at all ever" as opposed to no limit having yet been agreed. But that had to change to the situation I describe above.

Reply to
john boyle

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