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Bank current account customers who celebrated their victory in the
courts over alleged penalty charges will be re-corking the champagne as
the banks hit back to protect their profits by imposing higher charges
for some of their services.
Meanwhile, the banks will go back into battle with the Office of Fair
Trading this Thursday, when they meet for a case conference to decide
whether they want to appeal last month’s court ruling that the OFT
should be allowed to determine whether the penalty fees being charged
were fair or not.
The banks had argued that the charges did not come within the OFT’s remit for determining fairness, because the charges were fees paid by a customer in exchange for services provided by the bank.
Mr Justice Andrew Smith, in a judgment stretching to 119 pages, ruled that overdraft penalty charges and unpaid item charges such as fees for bounced cheques could not be viewed as a service.
He said: “If a bank declines to pay upon a relevant instruction, it supplies no, or no relevant, services by way of considering, processing or otherwise dealing with it,” and added: “I am unable to accept that either the paid item charges, and guaranteed paid item charges, or the overdraft excess charges, are the price or remuneration, or even a part of the price or remuneration, that the customer pays.”
His ruling opened the way for the OFT to rule on what a fair level of charges should be – much as it did with credit card penalty charges in 2006.
The meeting on Thursday will decide if the banks will appeal against the court ruling, or accept the ruling and submit to a fairness test by the OFT under the terms of the Unfair Terms in Consumer Contracts Regulations (UTCCR).
If the banks appeal, the case will have to go through the courts again – with a hearing unlikely before next year. If the banks decide not to appeal, a ruling by the OFT on a suitable level of charges could come as early as July.
Meanwhile, cases by bank charge protesters in the small claims court have been stayed until there is a definitive ruling.
Unsurprisingly, the banks, fearing that they will lose the right to impose charges that net them around £ 3.5bn a year, are getting their retaliation in first.
Even though the Bank of England held the base rate at 5% this month, and cut it the previous month, some banks have put their credit interest down and their overdraft rates up.
An estimated seven million consumers who use “packaged” fee-paying accounts will see the monthly charge for their current accounts go up, as banks seek to hold on to their profits. Other customers will find that the interest they receive on their current accounts when they are in credit has been slashed and the cost of their overdrafts has gone up.
Michelle Slade, personal finance analyst, at data provider Moneyfacts says: “This is really disappointing news for current account customers, particularly in the wake of the success in the High Court by the Office of Fair Trading. When the OFT announced that credit card default fees were too high, the institutions cut these charges but raised charges elsewhere to compensate for the lost revenue.
“It could well be that the banks and building societies are pre-empting a reduction in overdraft fees when the OFT case is finally settled. As a result, they are reducing credit interest rates and increasing overdraft rates now in order to continue to fund the free banking we are used to in the UK.”
Among those to slash their credit interest are Alliance & Leicester, which has cut the credit interest on its Premier Current account by 0.5 percentage points, and Halifax, which has cut the rate on its High Interest current account and Ultimate Reward Current accounts from 6% to 5%. Nationwide has reduced the interest paid on its FlexAccount by a staggering 47%, from 3.75% to 2%.
Meanwhile, Halifax has ramped the overdraft interest charged on its High Interest current account from 18.9 to 19.5%, while NatWest and RBS have hiked the overdraft rate on their range of current accounts by between 0.3 percentage points and 2.69 points.
Other charges are sneaking their way in. Alliance & Leicester has increased its foreign usage conversion charge by 0.20% to 2.95% and its foreign usage cash transaction charge from 1.5%, to 2%, with the minimum charge raised from £1.50 to £2. Lloyds TSB, which has about two million fee-paying Gold and Platinum account holders, has added a further £2 to the monthly charge on its packaged accounts. NatWest and Royal Bank of Scotland have similarly raised packaged current account fees by 95p a month, affecting the estimated 40% of their 14 million current account customers who pay an account fee.
Both Lloyds TSB and NatWest claimed that the increase in charges was a result of additional benefits that had been added to the accounts rather than an attempt to pre-empt a cap on their charges.
If the banks concede defeat, and the OFT caps overdraft fees at a rate the banks consider unacceptable, they will be forced to raise money in other ways – the so called “waterbed” effect as profits are squeezed. The worse case scenario for those who currently enjoy fee-free current account banking is that monthly fees could be introduced for all customers.
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