Bank charges stand up in court

For a long time banks have charged seemingly illegal levies for exceeding overdraft limits. Today they have been told by the highest court in the land that they can carry on doing so.


Banks are allowed by law to levy an admin fee against account holders who exceed their overdraft limit. They were not however, thought to be allowed to penalise customers for doing this. As such it was generally understood that a charge of one or two pounds might be OK, while the typical £30 charge was illegal.

To put that into context, take the example of one man I helped successfully reclaim illegal bank charges two years ago. One morning four direct debits went out of his account. The first and largest pushed him beyond his overdraft limit. The three subsequent debits sent him further into the mire. Charges were thus levied for each of the four transactions. That makes eight transactions in one morning. Then, a ninth transaction saw his monthly wage go into his account and clear his overdraft.

The time in which all nine entirely automated transactions took place was less than ten seconds. Yet the admin charge cost the account holder £120.

Delaying the inevitable?

The odd thing about the test case ruling is that the case was generally seen a delay tactic before inevitable defeat for the banks.

It was around three years ago now that consumer power started to mobilise against bank charges. Sites like even published template letters that people could print out and post to get their money back. Naturally the banks tended to reject all first letters in the hope that the account holder would be fobbed off and not bother to pursue the matter. Yet this widespread, valuable and successful business practice for dealing with complaints failed miserably. The individual sums involved were too big an incentive to keep sending letters.

Because everyone thought they had probably broken the law, a second or third letter was usually all it took to be refunded. So the banks sought another delay tactic, and were saved from the torrent of letters by the umbrella of the state.

A memorandum was signed between major banks and the Office of Fair Trading. This said that in return for agreeing to a test case, the banks were permitted to delay repayment until a ruling had been made. The ruling was formally on whether the OFT could investigate bank charges as illegal.

This accord meant repayments ceased. However, the memorandum was such a transparent delay tactic that it even included a special clause negating itself where the account holder faced unique hardship. In those cases repayment was expected to continue. As such a new widow whose financial situation was in turmoil would not have to wait to get her seemingly stolen money back.

Empty threats!

During the delay the banks prepared the ground for their defeat with empty threats. It was menacingly pointed out that the UK is unusual for having free banking as standard. Likewise in the last month banks have hinted at plans to charge customers for using cash machines. The message was simple. Take away one fee, and we’ll charge another.

Neither such threat looks plausible.

The structure of the LINK, the world’s busiest ATM network, makes charging very difficult. The contracts that member banks sign to use it do not allow them to charge other member banks for using their machines. As such banks can only charge their own customers for accessing their cash. That would allow one bank, and last time charging arose it was Nationwide, to oppose charging and win plaudits and customers galore.

The same applies to charging for standard bank accounts. If one bank does not charge, the others can’t either. They would lose too many account holders that way. And while losing customers who pay no charges seems like no great loss, it is worth noting that people prefer to buy mortgages, personal loans and insurance from “their” bank than a different one.

The Ruling.

None of that matters now though. Banks, consumers and the OFT alike will be surprised to find that overdraft charges are here to stay. The courts have overturned their previous rulings and decided that account holders and banks agree fairly to a contract in which banks can charge large sums for exceeding overdraft limits.

But that was not the end of the ruling. Though the OFT can’t now investigate the matter in regards to what is fair and unfair, the courts accepted it could still investigate in other ways. There are a great many consumer protection and business regulations that could be used. And the OFT clearly intends to keep trying. So while this is a blow for consumer power, it is not a fatal one in the battle over bank charges.


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