Bank Charge News

31/08/2007

Banks are set to make an estimated £20.5 million in interest while the Office of Fair Trading (OFT) run a test case against Britain’s high street banks, uSwitch.com has revealed.

Last month, the OFT announced a High Court test case against Britain’s high street banks to clarify the legality of bank charges, entering into an agreement with eight of Britain’s biggest banks to resolve the issue. Those banks include Abbey, Barclays, Clydesdale Bank, HBOS, HSBC, Lloyds TSB, The Royal Bank of Scotland, NatWest and Nationwide Building Society.

And until the test case takes place on 14th January 2008, the Financial Ombudsman Service (FOS) has frozen any outstanding claims it was dealing with and the Financial Services Authority (FSA) has given banks the option to freeze any unresolved claims until a decision is reached at the High Court.

Over the last six years, 16.8 million current account customers have been hit by bank charges – swelling the banks’ coffers by a total of £12.4 billion. In many cases, the amounts charged were actually illegal. To date, banks have refunded £2.6 billion to just over 3.8 million customers – an average refund of £686 to every successful claimant. But that’s only a drop in the ocean compared to the £12.4 billion they have over charged in the last six years. Bank charge victims paid out an average of £742 in charges over the last six years - Abbey customers paid almost double this amount (£1,376) compared to just £719 for HSBC and £450 for First Direct.

In the past six years, Lloyds TSB has raked in £1.932 billion, more money than any of the other ‘big 5 banks.’ It has the largest share of the current account market (14.8%) but has coughed up the lowest amount in refunds to its customers; just £36 million in the first six months of 2007 – HSBC with a market share of just 10.9% has paid out the most at £120 million.

But it could have been much worse for the banks. New research from price comparison site uSwitch.com reveals that the ‘big freeze’ on bank charges introduced last month will result in almost one million claims, worth a staggering £713 million, being put on hold. By keeping this money from consumers, these frozen claims will net the banks an extra £20.5 million just in interest over the next six months while the OFT prepares its case.

“Legal clarity on bank charges is long overdue,” says Mike Naylor, Personal Financial Expert at uSwitch.com. “The OFT has already sent out a clear message that it does not consider default charges to be a legitimate source of revenue. In light of the banking industry’s refusal to change its practices the issue is now set to be determined once and for all by the courts.”

He added that for consumers, the impact of the OFT’s test case against bank charges could extend far beyond the current account market. The outcome of the legal battle will establish a clear benchmark for the banking industry on the legality of penalty charges, and the same principles could then be applied to penalty fees for other financial products, such as mortgages.

“One thing is for certain – past experience has taught us that leaving the banks to do the right thing of their own accord is a recipe for disaster,” added Naylor. “In the meantime, those consumers who have recently received a settlement offer from their bank should think very carefully before they accept it, as once the offer is accepted, it is unlikely that they will be able to make any further claims.”