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Last Updated: Tuesday, 2 May 2006, 23:04 GMT 00:04 UK
Your reporter: Unauthorised overdraft fees
A person with bills
Which? said 1 in 4 consumers pay unauthorised overdraft fees
Bank customers have been making an increasing number of complaints about overdraft charges and levels of service.

BBC News website readers contacted us and asked us to investigate whether unauthorised overdraft fees were legal.

We looked into it - and reported back to the readers.

Deborah Alexander

Deborah Alexander, 38, a teacher from London, has recently paid more than 500 in bank charges.

When on maternity leave I kept going slightly over my overdraft limit by 10 or 15 and incurring heavy charges.

I was refused an overdraft extension and the bank seemed more interested in trying to get me to take out a loan which would have meant me paying more interest over the long-run, which I wasn't happy with.

I feel hurt by this experience, as I have been a customer of the bank for 21 years. Since they refused my request for an overdraft extension of 500, they have debited at least this in interest and charges.

Rhiannon Roberts

Rhiannon Roberts, 22, a student from York, hit with 56 in charges for 37p debt.

I went over my overdraft limit by 37p - and was automatically charged 28. I queried this and had it reduced to 14, which I thought was still quite harsh but a lesson learned. It was the first time I had ever done anything like this.

I was then shocked when my statement arrived to find that I had been charged a further 28 because the 37p unauthorised overdraft had occurred over two monthly charging periods. Totally unjustified and out of proportion.

Nick Campbell

Nick Campbell, 26, a maths student at Imperial College London, faced 152 in charges for 1.20 debt.

My bank refused to authorise a direct debit payment and charged me 38. This charge then pushed me into unauthorised overdraft, sparking another 38 charge.

When my credit card tried again to collect the direct debit another set of charges were sparked.

It is incredible that from such a small amount I have been hit with such high charges.

Bank charges are a disgrace. When you are down financially they kick you.

The charges issue examined
Unauthorised overdraft charges, it seems, are big business.

No bank or building society would divulge the money made from unauthorised overdraft fees, on the grounds that it was "commercially sensitive" information.

However, research by Which? suggests that one in four UK bank customers were hit by unauthorised overdraft fees during 2004, for a total cost of 3bn.

Recently - and unexpectedly - the Office of Fair Trading (OFT) ripped into the banking industry's charging regime.

The OFT said that in the future, credit card late repayment charges in excess of 12 would be considered unfair and likely to be challenged in the courts.

Charges, the regulator argued, "should only reflect the administrative costs of dealing with the default".

Not all that dramatic a statement, perhaps, when applied to just the credit card industry.

But when the OFT said the same principle would also apply to default charges on overdrafts, you could almost hear the gasps from UK's banks and building societies.

A senior banking executive told BBC News that the OFT's decision to came as a "bolt out of the blue".

"We had absolutely no idea they were going to do this," the executive, who wished to remain unnamed, told BBC News.

"One is left with the impression of a regulator that isn't doing its job properly."

But ultimately, whatever the current account providers think of the regulator's methods, the OFT move could mean the charges imposed on consumers for going into the red have to come down.

The anti-charges campaigner

The Bank Action Group (BAG) was formed in January as a self-help organisation showing consumers how they can go about legally claiming back bank charges.

So far, according to the BAG website, nearly 200 people have received refunds but none of these cases have made it to court.

Dave Smith, one of the group's two founding members, says he sees this as a sign the banks and building societies are "running scared".

For their part, the banks argue that the number of requests amounts to only a miniscule proportion of their customer base.

The Royal Bank of Scotland group, for example - with 13.5 million current account holders - told BBC News that it had received requests for refunds but that the numbers as yet were "pretty small".

According to Mr Smith, there is a lengthy - if straightforward - process process consumers wanting a refund have to go through.

"First they ask their bank or building society to detail all bank charges going back six years," he says. "They have to provide this information under the terms of the Data Protection Act.

"The consumer then writes stating their intention to sue in the county court for return of the charges.

"Under breach of contract law, penalty charges - such as those imposed for exceeding an overdraft limit - are unlawful. The banks know this."

The lawyer's view on charges

Lisa McLean, consumer lawyer at Laytons, told BBC News that some unauthorised overdraft fees may indeed be unlawful.

"Banks have a right under English law to claim damages from customers who, for example, exceed their overdraft limits and are therefore in breach of their contract with the bank," she says.

"But the banks don't want to have to go to court to claim damages every time a customer exceeds an overdraft limit, so they include these specific charges in their agreements. The bank can automatically raise charges as its remedy.

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"Some customers and consumer groups claim that these charges exceed the banks' actual damages when an overdraft limit is exceeded.

"If that is the case, the charges will amount to penalties, which are unenforceable."

But Ms McLean added the legality of charges had yet to be tested in the courts - with some providers, it seems, at this stage preferring to refund consumers.

"If the issue did get that far, the court would establish whether or not the charges in a particular case were a genuine assessment of the bank's damages, or actually an unenforceable penalty," she says.

"Anyone else incurring similar charges would then be able to rely on that case to defend themselves against their own bank's charges."

The banking industry defends its charges

Joanna Elson, executive director of the British Bankers' Association (BBA), was keen to stress that unauthorised overdraft fees were not a penalty but a fee for a service.

In the UK free banking is a reality in other parts it is not
Joanna Elson, BBA executive director

"The customer has not had the loan agreed. It is not that difficult to arrange an overdraft," she says.

"In many cases, the current account provider protects the customer's reputation by not bouncing cheques and direct debits."

Ms Elson added that the BBA's own research had shown that UK banking customers enjoyed a better deal than their mainland European counterparts.

"In the UK, free banking is a reality in other parts it is not," she argues. "Many people abroad have to pay tariffs for cashing cheques as well as a monthly management fee."

Seymour Fortescue, chief executive of the Banking Code Standards Board (BSCB), which administers the voluntary rules governing how financial institutions treat their customers, told BBC News that reform of charging was necessary.

"Disturbingly, the charges fall hardest on people on low incomes, such as students, who can least afford them," Seymour Fortescue, chief executive of the BSCB told BBC News.

"What I would like to see is greater transparency over charging," he says.

"There should be a summary box on statements outlining all the charges and a 14-day notification period before a charge is imposed.

"This should ease the problem of charges being imposed on charges."

The readers respond to what we have found

Deborah Alexander writes:

I feel the charges applied to my account are definitely penalties and not an accurate cost of administering any excess.

As for my reputation: if the bank is really concerned with maintaining it, why have they charged me ever-increasing amounts when they know I have a limited income - and have inevitably increased my debt?

If banks were sure of themselves and believed that they were administering charges fairly, they would go to court to prove their point and ensure they did not lose such a lucrative source of income.

Rhiannon Roberts writes:

The idea of a 14-day notification period sounds very good to me.

They should also have an alert system on your online banking account. I'm sure that kind of thing is easy enough to set up.

Whether or not we have a better deal than abroad is irrelevant. If the charges aren't legal under UK law than they should be changed, and one should not have to write numerous letters and threaten court action to get charges revoked.

The banks rely on knowing that most people won't do that so they get away with it.

Nick Campbell writes:

I find the BBA argument that the UK 'is better than Europe' not very comforting.

It is becoming clear they (the current account providers) are very nervous about this issue and will have no alternative but to review their policy

The fact is, I expect to pay some sort of charge when I have exceeded my balance, what I object to is the high amount and the sheer aggressiveness of the charges that has come about over the last few years.

Banks will refuse to take into account any mitigating circumstances. They have adopted the attitude of 'tough luck, pay up', and will hit consumers with multiple charges in only a few days.

I urge anyone who has been charged to start asking his or her bank questions.

It is becoming clear they are very nervous about this issue and will have no alternative but to review their policy if enough of their customers start asking questions.

Unauthorised Overdraft Fees (Selected Accounts)
Account Provider Unauthorised Fee Interest Charged
Alliance & Leicester 25 7.9%
Barclays 30-35 27.5%
Halifax 28 28.8%
HSBC 25 14.8%
Lloyds TSB 30 29.8%
Nationwide 20 24.9%
NatWest 28 29.7%




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