Partial victory for OFT in unauthorised overdrafts case
A test case, agreed last July between the Office of Fair Trading (OFT) and seven high street banks plus the Nationwide Building Society, has resulted in a High Court ruling that the OFT has jurisdiction to regulate overdraft charges.
Mr. Justice Andrew Smith said the ruling does not – necessarily – mean the charges are unfair, and rejected the OFT’s contention that the banks’ terms and conditions were not sufficiently plain and intelligible.
Fees and interest for unauthorised overdrafts two years ago ranged from Alliance & Leicester’s £25 and 7.9%, to Lloyds TSB’s £30 and 29.8%. Now, however, things are less straightforward, with A&L, Lloyds and presumably many others charging flat fees linked to the length and size of the unauthorised overdraft (see update below).
The aim, clearly, is to force borrowers into formal contracts. It is not at all clear why the OFT regards this as a bad thing – moral risk is, to put it mildly, a red hot issue right now.
The BBC quoted Doug Taylor, personal finance campaigns manager at Which?, who said ‘the banks should do the right thing now and concede defeat, agree with the OFT what constitutes a fair unauthorised overdraft fee and refund their customers as soon as possible.’
There have been hundreds of thousands of claims by bank customers alleging overcharging since early 2006. The BBC estimated that last year the banks refunded about £784m to nearly 378,000 customers.
Barring an agreement between the banks and the OFT, pending cases will be on hold until the end of May, when the banks must decide whether they are going to appeal against Justice Smith’s ruling.
Banks generate about £3.5 billion a year from these charges, and any substantial reduction will accelerate the industry trend towards flat charges for ordinary account-holders who live within their means.
Update: 29th April 2008
Emile Abu-Shakra, the media relations manager at Lloyds TSB, contacted HEXUS.channel to clarify what it charges for unauthorised overdrafts. In keeping with our HEXUS Right2Reply policy we have reproduced the statement, verbatim, below.
From 2 November, customers who go over their limit will pay a flat monthly fee of £15 and then a lower unplanned borrowing fee on a daily basis, irrespective of how many transactions they make that day. Being over the limit by less than £25 will cost 6 per day, from £25 to £100 will cost £15 per day and over £100 will be £20 per day.
Interest rates on unplanned overdrafts reduced by a third or more
To make interest rates easier to understand, Lloyds TSB has streamlined its prices so that planned and unplanned overdraft rates are the same. Customers will pay the same interest rate for unplanned overdrafts as the rate they pay for planned borrowing. This rate varies from account to account but, typically, unplanned overdraft interest rates will be reduced by a third.
