Bank charge
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[edit] Types of bank charge
The term Bank charge covers all charges made by banks to their customers.
In common parlance, the term often relates to charges in respect of personal current accounts. These charges may take many forms, including:
- monthly charges for the provision of an account
- charges for specific transactions (other than overdraft limit excesses)
- interest in respect of overdrafts (whether authorised or unauthorised by the bank)
- charges for exceeding authorised overdraft limits, or making payments (or attempting to make payments) where no authorised overdraft exists.
Much of the following discussion relates to the UK personal current account market.
[edit] Monthly account charges
Banks may charge their customers a fixed monthly charge for the provision of the account. In the UK, this was not common practice until the 1990s when banks began to introduce this type of charge as a means of product differentiation - often offering additional services bundled with the bank account itself (e.g. travel insurance, mobile phone insurance, preferential rates on other products).
[edit] Charges for specific transactions
Until the 1980s, most banks in the UK charged for all transactions. A number of newer entrants to the personal current account market took a "no fees whilst in credit" approach, leading very rapidly to a situation where no bank could compete with others without offering the same deal.
Whilst the loss of income incurred was, to some extent, covered by the interest earned on carrying balances in current accounts, the banks' profitability on personal current accounts was severely impacted by this change in the charging structure. In turn this led to the banks' increased use of charges for exceeding overdraft limits as a means of generating their required level of profitability.
[edit] Interest in respect of overdrafts
Most banks charge interest to their customers in respect of overdrafts. It is common to charge differentially for authorised and unauthorised overdrafts, with unauthorised overdrafts often bearing an interest rate two or three times higher than authorised ones.
In order to gain customers from competitors, banks will sometimes offer introductory 0% or low interest rates on authorised overdrafts, together with generous initial overdraft limits.
As part of the development of the personal current account market in the UK, certain banks have altered their overdraft charging structure to a fixed daily charge, irrespective of the size of the overdrawn balance.
[edit] Charges for exceeding authorised overdraft limits
As banks' income from transaction charges declined, due to the "free banking" which became the de facto standard in the UK personal current account market, and their income from carrying balances fell due to declining interest rates, banks sought to reinstate the profitability of their businesses by significantly increasing the charges levied for exceeding authorised overdraft limits, or when customers make payments (or attempt to make payments), including direct debits, cheque payments or standing orders, where no authorised overdraft limit exists. Typically banks charged in the region of £25 to £39 for transactions in breach of an authorised overdraft limit, irrespective of the size of the transaction or the degree by which the limit was exceeded.
These charges are commonly referred to as penalty charges, although it was held in a test case on the subject (link) that, other than in a few minor cases, most UK banks' charges did not constitute a penalty for breach of contract under common law.
The increase in the size of such charges led to public disquiet [1] and to internet-led campaigns against them. Early focus of such campaigns was the argument that they represented penalties for breach of contract, which would then render them limited to the cost to the bank. As noted above, the test case held that they were not penalties for breach of contract, and hence the costs the banks incur are not strictly relevant.
The campaigners' attention has now moved on to the concept of fairness, which are covered in UK law under the Unfair Contract Terms in Consumer Contracts Regulations (UTCCR). This aspect of the campaign has been supported by the UK Office of Fair Trading which considers that the level of such fees is unfair. The current state of the test case is that the fees are subject to a fairness test under UTCCR, which means that the OFT is free to rule them unfair due to their magnitude if it chooses to do so. The banks are appealing the test case ruling.
[edit] The law
The key aspects of UK law in question with respect to bank charge disputes are the Unfair Terms in Consumer Contracts Regulations 1999 (SI. 1999/2083) which supplemented the Unfair Contract Terms Act 1977. The test case currently proceeding is Office of Fair Trading v Abbey National and Others (2008)
On 24 April 2008 the High Court handed down its judgement in favour of the OFT [2], but the banks appealed this ruling with the appeal case heard in November 2008. [3] Pending a final ruling, individual court cases by bank customers have been subjected to a "stay", meaning that they are unable to be heard other than in cases of personal hardship.
On 26 February 2009 the financial institutions lost their appeal in the on-going High Court action, and at that time they were not given the right of appeal to the House of Lords. [4] Despite this, the banks exercised their right to appeal directly to the House of Lords which was subsequently granted and this hearing commence on 18 June 2009, though a decision isn't expected for several months.
[edit] See also
[edit] References
[edit] External links
- The Guardian, 23 June 2009, Canada: Where bank charges are usual
