Bank Charges - Fair Or Unfair – Who Decides?

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Most of us think that banks have a legal right to make all the charges they do. This is a popular misconception. Whether the banks have the right to charge us for unauthorised overdrafts and other account infringements depends on whether they can be seen as fair charges that are contractually allowed or unfair penalty charges.

Breaking The Contract

The reason that banks feel they have the right to charge for unauthorised transactions is that by going over the limit you have broken your contract with the bank. Every current account is a contract, which you sign when you fill out the application form and agree to abide by the terms and conditions. In most cases, breach of contract can be pursued under the law. However, this would be time consuming and inefficient, so instead the damages that would be paid if the matter went to court are written into the terms and conditions. Bank charges for unauthorised overdrafts, bounced cheques and returned direct debits are those ‘damages’.

The charges made by the banks should reflect what they will lose, and this is legally allowed. The bank is allowed to recover:

• the money borrowed without agreement
• the costs incurred when notifying the customer
• the cost incurred to return a cheque or direct debit
• the costs incurred when the customer does not make the minimum payment on a credit card

How much does this cost the banks? Unsurprisingly, banks have been reluctant to reveal what it actually costs them to do these things, but many estimates put the cost to banks at somewhere under £5 – and that’s generous. In reality, the cost of printing an automated letter and sending it with a franked stamp may be as little as £2.50 – and that’s a far cry from what most banks charge.

Here’s an example. If you go over your limit by £20.00, most banks will send you a letter (about £35), impose a monthly unauthorised overdraft fee (about £28), and will probably levy unauthorised interest at over 30 per cent a year. That’s a pretty hefty price to pay on your £20.00 mistake. Some estimates are that the charges banks make are more than 417 per cent over the true cost of getting what they are owed. And if that’s the case, the charge is a penalty charge, rather than damages – and that’s where some customers have been able to fight them.

• Consumers Win On Penalties

Since there’s no way it can cost a bank £35 pounds to send an automated letter, that charge is patently unfair. In fact, in the eyes of the law, many UK bank charges are penalty charges instead of contractual damages. And penalty clauses, by law, must not exceed the cost of the breach. That fine point of law means that most bank penalty charges are not legally enforceable and can be challenged by the consumer.

In April 2006 the Office of Fair Trading (OFT) announced that bank charges and credit card fees are often unfair and unlawful. Its view is that charges should “only reflect the administrative costs of dealing with the default”. In other words you should only be charged what it costs the banks to get their money back from you. It added that this principle should apply not only to credit cards, but also to default charges on overdrafts, store cards and mortgage products. This is currently under investigation, with a ruling expected later this year.

The OFT suggested that a reasonable average charge for this type of transaction is £12. While this does not guarantee that charges below this amount will always be viewed as fair, the OFT ruling suggests that charges above this amount will always be seen as unfair.

Consumer organisations are also on agreement on the unfairness of bank charges. For example, Which? has called for the practice of adding exorbitant charges and high interest to unauthorised overdrafts to stop. It has also called for banks to stop charging unauthorised overdraft interest rates on the authorised portion of overdrafts. Finally, it has asked that the Banking Code be revised to that banks must give customers two weeks’ notice of charges to that they have a chance to move their accounts out of the red.