What is a fair charge for bouncing a cheque or for straying into unauthorised overdraft territory? The answer is that we don’t know. Some consumer groups reckon it is around £2.50, representing the true administrative costs to the banks of such events. Others put the figure a little higher at, say, £10 or so.
What is almost certain, however, is that the costs are significantly lower than the £25-plus penalty charges that many customers have been suffering in recent years.
A fee for a bounced cheque or unpaid direct debit is supposed to be proportionate to the costs incurred by the banks. Hence the widespread view that a £35 charge for an automated letter saying you have breached your authorised overdraft facility is more than a little steep.
There was some excitement this week that banks will finally be forced to reveal the true costs of unauthorised overdraft fees following a district court ruling against Yorkshire Bank and Alliance & Leicester. But this ruling was little different from countless others before it.
If the case proceeds, the two banks will have to disclose how they calculate their penalty fees as well as the true costs of servicing a bounced cheque. More likely, however, is that the banks will settle out of court, thereby avoiding the need to reveal the truth behind these costs.
The last thing the banks want is a definitive precedent that will force them to make compensation payments to their customers.
Consumers have the right to seek to reclaim bank charges going back up to six years. If there was a definitive case and it went against the banks, this would open the floodgates for all and sundry to seek refunds from their bank.
And there is a lot of money at stake. Some analysts estimate that the total amount of money raised by the banks from penalty charges over the past six years is as much as £10bn.
Without a definitive court ruling, the next best hope is the Office of Fair Trading which is looking into these penalty charges and is expected to reach a decision by the end of this year. It could come up with its own cap on charges or it could refer the matter to the Competition Commission. Either way, the days of penalty charges of £30 or more are probably numbered.
This explains why banks are taking other steps to recoup the costs. In my column in March, I wrote that a range of “stealth” charges from higher borrowing costs on overdrafts and bigger fees on overseas currency withdrawals look likely.
We are already seeing firm evidence of this. Even before this week’s interest rate rise, Uswitch.com, the comparison site, calculated that the biggest banks had increased their borrowing rates by almost one percentage point whereas interest on balances had barely moved. From the beginning of the year to mid-June, overdraft rates at nine of the big banks increased by 0.93 per cent. By comparison, interest on bank balances rose by just 0.02 per cent on average.
Halifax and HSBC increased their overdraft rates by up to 2 percentage points. Uswitch.com reckons bank customers in the red are paying over £50m a year more.
The differences can be stark. Research from Moneysupermarket.com found that the cost of going just £60 over an agreed overdraft limit could vary by more than £108 depending on whom you bank with. It assumed you wrote three guaranteed cheques for £20 each. With HSBC the total cost would be £25. But with NatWest’s Current Plus account the total charges would be £133.
On overseas spending the picture is very similar with some good deals and some poor ones. On cash withdrawals with debit cards, some banks, such as Lloyds TSB, have upped their currency loadings on cash withdrawals to a hefty 2.99
per cent. At the same time, withdrawal fees have also been rising with some now charging a minimum of £2. Purchases in shops and restaurants overseas are also now more expensive. NatWest has hiked its transaction charge for debit cards from 75p to £1.25. Halifax charges a whopping £1.50 (see Page 5 of this section).
I’m sure we have not seen the last of these increases in costs. Which – rather frustratingly – means we need to pay even closer attention to the reams of literature that financial services companies keep sending us.
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