Q&A: battle for the bank charges

Last Modified: 14 Jan 2008
By: Bridgid Nzekwu

The Office of Fair Trading takes on seven banks and a building society over charges to millions of customers. Our money reporter Bridgid Nzekwu draws up the battle lines.

The opening stages start today in a major test case that will affect millions of people with bank accounts.

The Office of Fair Trading is taking on seven high street banks and one building society over what it says are unfair penalty fees levied on customers who exceed their overdraft limit.

The banks say they are NOT penalty fees, but charges for a service.

A High Court judge is now sifting through the documents in the case, which opens in full on Wednesday. Our money reporter Bridgid Nzekwu explains.

Why does it matter of it's a penalty or service?

It's absolutely critical, as it determines whether the OFT has any power to stop banks charging what they like when customers exceed their overdraft limit.

Until the law is clarified, hundreds of thousands of claims for refunds on hold.

If the judge agrees that customers are being charged penalties, then under current regulations the OFT has power to investigate exactly how these fees are calculated, and if they're fair.

Banks involved in this court case are: HSBC, HBOS, Barclays, Lloyds TSB, Abbey National, Clydesdale, Royal Bank of Scotland, and also Nationwide Building Society

But the outcome will apply to all banks.

How much are banks charging?

Some customers have been charged as much as £39 every time they go over their limit.

But the average charge is usually something like £25 or £30. UK banks make £3.5bn a year out of charges for unauthorised overdrafts. That works out to £10m a day.

Hundreds of thousands of people have demanded the money back and the banks are estimated to have refunded somewhere between £500m to £1bn.

If banks are forced to pay everyone back it will cost them billions more. Campaigners say that's what should happen because the fees are unjustifiable.

Unauthorised Overdraft Charges

Average charge £25 - £30
Total bank revenue: £3.5bn per year
£10 million per day
Refunds: £500m - £1 bn

Is this case the end of the dispute?

It could go on for months, because whichever side loses is likely to appeal.

And if the OFT wins they may go back to court anyway. They want to decide what amount is fair to charge people who go over their overdraft limit.

If the banks don't accept their figure, they'll be back in court.

Can the banks make their money elsewhere?

There is talk in banking circles that this test case could bring about the end of free banking in the UK.

Which? says that's scaremongering - but some think if banks lose they'll charge up to £300 a year just to have a current account.

That would bring UK into line with parts of Europe where customers do have to pay an annual fee to open an account, but don't get slapped with these overdraft charges.

The test case will last 8-10 days, with judge's ruling expected in April or May.