PENALTY CHARGES

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Banks are on the brink of having to pay out £30billion to thousands of furious customers in the mass revolt over unfair overdraft fees. Growing numbers are threatening to sue their banks in a rebellion which has already generated £20million for account holders. By the time refunds are claimed for the last six years, the legal limit for backdated claims, the final compensation bill is expected to be nearly £30billion. Complaints against excessive penalty charges, which rake in almost £5billion a year for the high street giants, have hit record levels.

In the last year, the number of people complaining to the Financial Ombudsman Service has risen from an average 60 a week to 7,000 a week. Banks charge around £35 for an unauthorised overdraft and up to £39 for bouncing a cheque or direct debit payment, even though the administration cost is only £4.50. On top of this, they will charge an interest rate of close to 30% on unauthorised overdrafts. The Office of Fair Trading is now investigating whether the charges are justified. Marc Gander, of the Bank Action Group, said, "Our records show 5,146 people have recovered more than £7million over the last year. But we reckon this represents only 35% of the total amount which is probably nearer £20million." (Source: Sunday Mirror, Feb/07)

The Office of Fair Trading wants overdraft charges on current accounts to be cut and possibly capped. At present customers can be charged as much as £39 when they spend more than their overdraft limit. Campaigners challenged the OFT to 'get off its knees' and support consumers against the banks' high charges. The OFT has also been battling banks over the high cost of credit card penalty fees. It argues charges of £25 are illegal because they amount to an unfair penalty rather than a true reflection of the costs to a bank when a customer overspends.

A Government inquiry in 2000 headed by former Stock Exchange chairman Don Cruickshank highlighted the problem of banks over-charging customers but the Government and the OFT have made little progress in reducing high fees. In fact, banks have increased both overdraft and credit card charges by around 40% in a little more than two years. The huge profits amassed by HSBC, LloydsTSB, Barclays, RBS-Natwest and HBOS are 15% higher than the previous year.

Responding to the OFT's plans, the British Bankers' Association said, "Our members stand by the fact that the charges levied reflect the cost of collection for accounts that have defaulted. It is appropriate that those costs are born by those who step outside their terms and agreements. If you look at overdrafts, for example, charges are entirely avoidable if people agree the necessary facilities and maintain a dialogue with their bank. These are not hidden charges. They are published on websites and in brochures." (Source: Mail on Sunday, Mar/06)

Abbey sent a 19-year-old into a spiral of debt after taking more than £700 in charges from her account in just one day. Andrea Beaton, who earns £800 a month, is facing a bill of more than £1,320 because she cannot cope with mounting bank charges. The charges have been climbing since August 2005, when Andrea went overdrawn accidentally. Each month since then, charges have been added to the account, leaving her less and less to spend the following month.

Abbey claims that every time a charge was applied, someone monitoring her account approved it. Yet at no stage was she warned about the growing problem. Nor was her account frozen. Andrea, who admits to knowing little about financial matters, overspent in August 2005, but was not charged a fee because her account was normally well managed. However, when she went overdrawn again in October, the bank imposed a £35 charge. This led to her going a few pounds overdrawn again in November, costing her £70 in charges. By December, her budget was so stretched the charges had climbed to £140.

Andrea realised how serious the problem was only when she received her statement in January. She contacted Abbey asking for an overdraft so she could get back on track. But her request was turned down and instead she was advised to contact Abbey's debt management team. Meanwhile, charges were piling up, with another £365 added in January. Andrea, from Washington, Tyne and Wear, contacted the debt management team and offered to repay £50 a month. This was rejected and she was threatened with legal action and debt collectors being sent to her home unless she paid back £300 a month.

Abbey said if Andrea was struggling, she should renegotiate the repayments. Like all High Street banks, Abbey charges customers every time they go beyond their authorised credit limit. For unauthorised borrowing, the interest rate is 28.7%, there is a monthly unauthorised overdraft fee of £20, plus £30 for every transaction while overdrawn and £35 for bounced payments. Under banking rules, charges should only cover the cost of overseeing the transactions.

Abbey says that when a customer exceeds their credit limit and a transaction occurs, a cost is incurred because the credit status of that customer has to be reviewed and a decision made on whether to allow the transaction, bounce it, or freeze the account. This implies someone at Abbey had to be monitoring Andrea's account, allowing her to get deeper into debt and approving the charges every month.

Abbey says it was Andrea's responsibility not to go further overdrawn, but she argues she spent only to cover basic living costs. The bank says the charges were implemented correctly and Andrea had been warned about how to manage her account. It adds that the person authorising the charges would only have seen she had a positive balance at the end of each month because that was when Andrea's salary was paid in. (Source: Mail on Sunday, Apr/06)

Banks have launched a secret move to stop customers trying to claim back excessive overdraft charges. They have altered the wording of the terms and conditions for current accounts in a way that may hamper new claims, but have chosen not to publicise the changes. Barclays and HSBC have quietly changed the terms and conditions on current accounts, so that the £25 charges made when an overdraft limit is exceeded will instead be called "Arrangement Fees'. First Direct is set follow suit.

Mike Dailly, principal solicitor at the Govan Law Centre, said, "This is an attempt by the banks to evade the current movement for refunds. But just changing the name of the charge isn't going to get them off the hook, if what they are doing is the same." A spokesman for the Financial Ombudsman said, "No one has actually defined in court what these charges currently are. In general the names are not important, it is what the charges do. We have said in the past that you can't use language to change the actual function of that charge."

Barclays said, "We are trying to be as transparent as possible and have updated our terms and conditions across the board, not just on borrowing." A spokesman for HSBC and First Direct said, "The changes were made in response to growing consumer dissatisfaction with the existing structures." (Source: Mail on Sunday, Mar/07)