Excessive bank charges – the legal case moves on (slowly)

It seems to have been a long time since legal action was started regarding the excessive penalties being charged by the banks for accounts that go overdrawn or have payments bounced due to lack of funds. It is a mistake to think of this case as only refering to overdrafts.

The main reason for this delay is that a separate legal case arose over whether or not the Office of Fair Trading had the legal power to decide on what level of charges were considered to be fair.

The judge would clearly prefer the Office of Fair Trading to be empowered to deal the issue of bank charges on an ongoing basis. His ruling effectively ‘hijacked’ the original court case and was a victory for the Office of Fair Trading, which is now seeking legal confirmation that it can rule if bank charges are fair or not. But it did mean that a separate legal case was now required, the original case was now ‘on hold’ until this new judgment was completed. 

This new court case should start before the end of the year, but further delays could occur if either party take an appeal to the Law Lords.

The banks earn an estimated £3.5bn a year of income from charging customers who have bounce checques, direct debits etc. or go overdrawn without permission. It is not the principle of charging people for going overdrawn or for bouncing outgoing payments that is being challenged, it is the amount of the charges.

The banks, with their billions of pounds profits and their highly paid executives, justify charging people for bouncing cheques, direct debits and standing orders. These charges are typically £30 for each ‘bounce’. The banks are happy to resubmit a failed direct debit a few days later even if no money had gone into the account in the mean time. Of course it would be bounced again with another charge applied!

Note that no overdrafts are involved in bounced transactions. It is just a computer program doing what it is programmed to do!

An unauthorised overdraft will only occur if a cheque covered by a guarantee card is used.  It is indeed reasonable to charge people for such an overdraft. However I would seriously question that charges of £30 upwards are reasonable.  Why not charge people a similar amount as would be charged for an arranged temporary overdraft. Of course charges for having an overdaft, authorised or not, will accrue over time.

The majority of people on lower incomes have some sort of ‘basic’ bank account. These accounts do not have a cheque guarantee card. It is impossible for these accounts to go overdrawn, unless the bank allows it to happen. To many people with basic bank accounts these charges are simply wicked, a penalty that is out of all proportion to the offence!

A really difficult situation arises where a simple mistake, not everybody is able to manage money effectively, can cause a number of direct debits to be failed incurring a charge on each transaction and then the system tries again and applies another set of charges before, typically, cancelling all the direct debit mandates.

Suddenly a person can owe hundreds of pounds to the bank. Then any money being paid into the bank account disappears into the overdraft and they are simply unable to pay their bills or their mortgage or their rent, or even buy food for the family. It is a devastating situation for many people who simply cannot cope with what is happening to them!

People are encouraged by the government to get their benefits, pensions etc paid into a bank account, it is cheaper for all tax payers! But a £30 penalty when your income for the week is possibly under £100, is the equivalent of charging a person on an average wage of (say) £25K a penalty of £150.

The fixed charge for incurring an unauthorised overdraft or to have a payment bounced, is totally out of proportion for those people on lower wages, benefits or pensions. 

 

Tags: bank, banks, bounce, charge, cheques, direct debit, direct debits, overdraft, overdrafts