Compare Online

Bank Robbery!- The Fight Against Unfair Charges

On January 8 this year, a team of intruders walked into the busy Camden Town branch of the Royal Bank of Scotland, seizing four computers, two fax machines and a till filled with cash. Only when the branch manager unwillingly agreed to their demands did they eventually leave. This, however, was no bank robbery- indeed it was done with the blessing of a court order, and stunned customers may have cheered the invaders on had they known the full facts. They were, in fact, debt collectors, merely executing a warrant allowing Declan Purcell, a long-standing RBS customer, to reclaim £3,400 of bank charges imposed on him over the past six years. The courts had declared the charges illegal and RBS had failed to repay them in good time, necessitating the drastic action. You’ll be glad to know the items were replaced after the manager gave a personal undertaking that the debt to Mr Purcell would be paid in full.

In the space of just 18 months, what was initially a small trickle of complaints against bank penalty charges has grown into raging torrent- the Financial Ombudsman recently reported handling around 1,000 new calls every day. Customers are fed up with being charged £20-£40 every time they go just a few pence overdrawn, or bounce a cheque due to the slow clearing of a receipt, and are looking to claim the money back. Plenty is at stake here- the six major UK high street banks have made an estimated £10bn from penalty charges over the past six years (the legal time limit for reclaims). It seems like an ugly business any way you look at it, with the burden of providing this profitability concentrating squarely on the most ‘delinquent’ customers (such as Mr Purcell above), many of whom may be owed several thousand pounds in refunds.

The Legal Position- Penalties and Costs

Every current account taken out is a contract between the customer and the bank- and there’s nothing illegal in the bank imposing penalty charges on customers who break the contract terms. However, under the Unfair Terms in Consumer Contracts Regulations (1999) all penalty charges must truly reflect the costs of administration . This is a legal test the vast majority of bank charges clearly fail.

Assigning precise administrative costs to sending out an unauthorised overdraft letter may be tricky, but when the BBC’s Money Programme investigated the issue last year they were met with stonewall tactics from all the major banks. Setting up their own ‘commission’ (consisting of two banking professors and a former NatWest executive), the programme concluded that the highest charge that could be justified was around the £4.50 mark - far lower than is typically charged in practice. Faced with a seemingly indefensible position, the banks have been paying out tens of thousands of pounds in refunds to individuals prepared to go through the complaint procedure.

The Banks Fight Back- Berwick v. Lloyds TSB

By the beginning of this year, the prospect of thousands of customers clawing back millions in ‘unfair’ charges was just too much for the banks to take lying down. In April, Lloyds TSB sent shockwaves through consumer groups by winning their case against customer Kevin Berwick, who was attempting to claim back around £2,500 in penalty charges at Birmingham County Court. Despite Mr Berwick being described by District Judge Cooke as “a model litigant”, always presenting both himself and the correct paperwork before the court in good time, his case was dismissed.

Reading through Cooke’s 23-page judgement is a rather tedious exercise in what a customer like Mr Berwick knew (or should have known) when first applying for the account. Cooke decided to accept Lloyds’ argument that because all charges were detailed in the bank’s literature before the application was completed, they were not penalty charges for breaching a contract, but in fact ‘service fees’ for administering an overdrawn account . The court has no jurisdiction over service fees agreed to in advance by the customer, no matter how large or unfair they may seem.

Although taking a one-off hit of £30+ may feel like a penalty charge, one can see Judge Cooke’s point of view- is the customer really ‘breaking the contract’ with the bank every time they go a few pounds past their overdraft limit? Whatever the rights and wrongs, it should be noted that this decision is not binding on any other court or judge, although some have intimated they will use it as legal precedent. Indeed, since the case Which? Magazine has recommended going through the Financial Ombudsman Service (which has yet to make any judgement), rather than using the courts.

No Win, No Fee- Lawyers to the Rescue!

With the banks on the offensive, many customers may be put off from starting out on a legal campaign to reclaim their charges. However, we live in a modern capitalist economy where everything has its price- including your refund claim. Typing ‘bank charges’ into any internet search engine brings up at least 10-15 claims handling companies desperate for your business, all claiming their legal ‘expertise’ will ease the whole process through with the minimum of fuss.

Virtually all these companies work on a no win, no fee basis, taking a percentage (typically 25%, some with a £100-£200 minimum) of any successful refunds . Quite who the ‘experts’ setting up these online outfits are is unclear, though I would not be surprised to see several ex-bank employees among them, exploiting their insider knowledge of how to grease the wheels of customer complaints departments. Come to think of it, wouldn’t it be worthwhile for one of the banks to set up a claims handling company themselves? They would only pay out a net of only 75% on their own claims, and the 25% earned on other banks’ claims could end up paying for their own liability in full…or am I just being cynical?

Which? Magazine has said that the use of claims handling companies is unnecessary - customers should be able to reclaim 100% of the amounts they are owed by following step-by-step guides available on their own and other websites. The process, however, takes a little time and organisation- qualities that may be in short supply for those who have racked up £1,000s in bank charges over recent years.

Beginning of the End for Free Banking?

If the Berwick case proves to be merely a temporary setback for consumers, it may be that we are about to witness a complete change of business model in UK retail banking. The banks still need to make their millions to satisfy shareholders, and if they can’t do it by hitting ‘delinquents’ with sky-high penalties, they’ll have to do it by charging the rest of us.

Yes, universal free banking- a feature unique to the UK since the early 1980s- may be under threat. Of course, UK banking has never truly been free- we pay by accepting paltry interest rates on current accounts (typically less than 1%). Still, regular monthly charges could be a tough sell for the banks, even if they are forced to raise current account rates a little to partially compensate. For example, late in 2006 First Direct announced it would be charging £10 per month to customers with balances under £1,500- and 20,000 customers have since closed accounts in response. It should be noted, however, that many of these may have been seldom used or ‘dormant’ accounts the bank was only too happy to get rid of. In addition, a recent MoneyExpert.com survey found 75% of respondents open to the idea of monthly fees, perceiving free banking as inherently ‘unfair’ on those bearing the brunt of high charges.

In any case, anything has got to be better than bank customers incurring £1,000s in penalties, only to send the bailiffs round to their local branch to recover them- no matter how entertaining for onlookers.

Other Related Articles 
Gaining Your Interest - How Rate Rises Affect You - Tuesday 24th May 2007
Are You HIP to the New Home Sellers Packs? - Tuesday 29th May 2007
The Loan Danger Rides Again: Borrowing, Fraud and the Sub-Prime Sector - Friday 10th July 2007
Returning to Rent- Has UK Home Ownership Reached its Limit? - Tuesday 17th July 2007
Ethical Banking- More Than Just Greenwash? - Friday 10th August 2007
Carbon Offsetting- Tackling Climate Change, or Just Hot Air? - Friday 10th August 2007
Insurance Fraud- From Fake Paperwork to Staged Crashes - Friday 15th August 2007
Non-Standard Credit – Part 1 Pawning, Cash Advances and Home Collection - Friday 21st August 2007
Non-Standard Credit – Part 2 Person-to-Person Lending and Borrowing - Friday 28th August 2007