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May 23, 2008 6:48 pm

Banks rack up charges

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Banks are dealing customers a double blow by offering less attractive interest rates on credit balances and overdrafts, while at the same time continuing their fight for high penalty charges.

Some of the rate changes were made just a few weeks before a number of high-street banks pledged to appeal against the Office of Fair Trading’s decision to probe whether high bank charges are fair. The appeal will prolong the OFT inquiry for many more months and mean customers will have to pay high charges until well into next year.

Current account holders who have claimed refunds of penalty charges will also have to wait, possibly for up to another year.

Those account holders who exceed their overdraft limit or have a payment rejected are still being charged up to £35, sometimes three times per day.

At the same time, customers of a number of the biggest banks have been hit with less attractive credit interest rates and more expensive repayment rates on overdrafts, credit cards and mortgages in recent weeks.

A driving force behind these changes is the increased pressure on lenders as a result of the credit crunch. Banks’ margins are being squeezed as access to wholesale funds has become markedly more expensive. Banks are therefore trying to claw back profit wherever they can.

But some commentators believe the changes on current accounts could also be pre-emptive moves by the banks to offset the significant loss of income they would suffer from any potential cap on penalty fees. Bank charges are estimated to generate around £3.5bn per year for the banks.

“We have already seen signs
of banks pre-empting a reduction to these fees with credit
interest rates being reduced
and overdraft rates being increased by many of the
big high-street banks and
building societies in the last two months,” says Michelle Slade, an analyst at

Many big banks have pushed through interest rate cuts well in excess of last month’s base rate cut but have not reflected the reduction in mortgage, overdrafts or credit card repayment rates.

Nationwide and Halifax, two of the eight banks involved in the OFT case, have cut the interest paid by their current accounts, while simultaneously increasing the rate on overdrafts. HSBC and Royal Bank of Scotland have also made unfavourable changes in interest rates.

Research shows that rates on personal loans have also risen in recent months. Average interest rates on unsecured loans of £5,000 and £7,500 have increased by 70 and 90 basis points respectively in the past six months, according to

Rates on the most competitive deals have increased from 6.4 per cent in November to around 6.9 per cent now, says the comparison website. During this time the base rate has been reduced three times.

If the OFT concludes that bank penalty charges are unfair and imposes a similar cap to the £12 it introduced on credit cards two years ago, banks could try to push through even higher charges on current accounts.

“The banks are refusing to swallow this loss of revenue without fighting back,” says Richard Brown at the personal finance research and data analysts.

He fears that banking customers who have managed their finances well could end up paying for those who have repeatedly breached the terms of their accounts. says banks could implement fee structures similar to those in the US and parts of Europe, such as annual account fees or debit card charges.

UK banks do not generally charge for standard current accounts, but offer “premier” accounts, which incur monthly costs for added benefits – such as travel insurance and motor recovery services. The cost of some of these accounts has also crept up in recent weeks. Lloyds TSB, Natwest and RBS have increased the monthly fees on their packaged current accounts by up to 20 per cent.

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