For the first time, a bank has had its charges upheld in court. Since the Office of Fair Trading warned credit card providers last year that their penalty charges were excessive, causing all providers to cut fees to £12, people have been encouraged by numerous consumer groups to demand the refund of charges from bank accounts too. These charges might be for an unauthorised overdraft, exceeding an overdraft limit, insufficient funds to pay a cheque or direct debit – in other words, the charges are penalties for people who overdraw their bank accounts, borrowing the bank’s money without permission.
In some countries, going overdrawn is actually illegal. After all, it is only just short of stealing someone else’s money. Yet UK consumers seem to think it is their right to overdraw their accounts without even arranging an overdraft first, and not be charged for it.
It’s clear that the banks are using the charges to make profit, and if the law currently says that penalty charges are only allowed to cover administrative costs, then I suppose the current charging regime is illegal. But I don’t think it should be. In the recent case, the bank had argued that it was actually charging fees for a service, rather than as a penalty. Hopefully, one way or anther, banks will be able to continue making similar charges.
Why am I so keen for banks to be allowed to charge their customers penalty fees? Well, it may come as a surprise to any readers from abroad, but in the UK, almost everyone still enjoys free banking. We don’t have to pay to keep a bank account, and can enjoy a cash card, debit card, cheque book, direct debits, internet banking, etc. without having to pay a monthly fee. Banks make up for this by charging higher penalties for people who go overdrawn. Now, let’s face it, the banks are never going to accept reduced profits, so if they are not permitted to continue charging these penalties, they are going to find other ways to take money from their customers. The net amount consumers pay is going to remain the same, it’s just how the payments are distributed between a bank’s customers that will change. The bottom line is, without penalty charges, banks may well introduce monthly fees for their accounts. There is already an increasing trend for “premium” bank accounts that incur a monthly fee, and one bank has announced a monthly fee for accounts with low balances.
Outlawing bank charges will not be better for the consumer at all. All it will mean is that everyone is paying charges, instead of just those people who are not very good at managing their money. There’s no excuse for regularly going overdrawn. The last thing this country needs – increasingly a country where people are piling up debt and haven’t a clue how to budget or look after their pennies – is a change to the banking system that makes life easier for the financially reckless.
One final note is that, while people may be pleased that they are receiving refunds for unauthorised overdraft charges, it actually only represents a small part of the extra profit the bank is making from them. The interest rate on an unauthorised overdraft is typically around twice that for an authorised one. Hopefully, if penalty charges are ruled illegal in a higher court, the banks will respond by tweaking their interest rates. That might enable those who prefer to save and not spend to retain the free banking they deserve.