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Last Updated: Tuesday, 6 March 2007, 23:49 GMT
Banks and consumers at loggerheads
By Julian Knight
Personal finance reporter, BBC News

Bank customers at cash machine
Customers are looking to take on the banks

Profits may be high but bank customers are in revolt.

Customer service departments, the Financial Ombudsman service and even small claims courts are being swamped by angry consumers.

The chief reason is fees imposed by banks on customers who go overdrawn without permission.

Thousands of people claim that the charges they have had to pay when going into unauthorised overdraft are unlawful.

Under consumer law, fees have to reflect the true costs to the bank of the customer going overdrawn.

In other words, imposing an excessive penalty to boost profits is out of order.

Relationship breakdown

Banks and building societies are settling out of court or not contesting claims for the return of penalty fees - a policy which many suspect is an attempt to avoid a test case.

However, as a parting shot, Alliance & Leicester and the Nationwide building society have been closing the accounts of some people who have taken them to court.

Their reason?

Cheque book

The relationship between them and the customer has broken down completely.

They have a point.

"There is a groundswell of anger out there about the subject of bank charges and customer service," says Emma Bandey, personal finance campaigner at Which?.

"People feel charges are too high, unfair and breach regulations. They also feel taken for granted.

"In our surveys the big five High Street banks always come out bottom in terms of customer satisfaction."

Against the backdrop of seething discontent, the Office of Fair Trading is investigating bank charges and may well decide - as they did with fees levied on people that miss their credit card repayments - that the currently level of charges is too high.

It may not be the storming of the Bastille or the Winter Palace but revolt is in the air.

Mortgage exit fees

It is not just penalty charges which are prompting the ire of consumers and regulators.

In January, the BBC revealed that up to 10 banks and other financial institutions face fines from the Financial Services Authority (FSA) over the sale of payment protection insurance (PPI).

If customers are hit with fees they should look to switch providers
Emma Bandey, Which?

PPI is a form of insurance that covers people in case they cannot pay loans as a result of illness or unemployment.

In addition, the FSA has told lenders that they may have to refund some customers mortgage exit fees.

A mortgage exit fee is the charge levied by the lender when a borrower closes their mortgage account.

Then there is the slow-burn issue of call centres moving offshore.

Time and again, consumers say that they would prefer to deal with a home-based call centre. Nevertheless, calls are still often answered in Delhi rather than Droitwich, or Cape Town not Carshalton.

Sacred cow

The latest widening of the chasm between banks and their customers has come over the issue of free banking.

Free current account banking is a bit of a sacred cow.

UK consumers generally do not pay for banking services while their accounts stay in credit.

But this is being eroded.

Lloyds TSB and the Nationwide have both questioned the long-term viability of free banking.

Reading between the lines, their suggestion is that if penalty charges vanish then more consumers may ultimately have to pay for current account services.

In the current climate, banks have to be seen to be lean
Richard Hunter, Hargreaves Lansdown

Last November, First Direct broke cover and said it would start levying a fee on accounts which did not deposit 1,500 each month.

Increasing numbers of consumers are being moved - with little notice - into so-called "packaged" accounts.

These are current accounts with bells and whistles attached such as travel insurance. The sting in the tail is that they charge a monthly fee.

Ms Bandey says banks make big money from money held in current accounts and that customers should not take moves to charge lying down.

"If customers are hit with fees they should look to switch providers."

Previous rows

Customers and banks have had spats in the past.

At the turn of the millennium, it seemed as if UK banks were poised to charge their customers to withdraw cash from ATMs.

A high-profile campaign against charges followed and the banks backed down.

And in 2000, a government sponsored report by Don Cruickshank found that banks treated low-income customers and small businesses unfairly.

A period of relative calm then descended. The banks were happy as there was a credit boom to boost profits, and consumers felt richer because their houses shot up in value.

But this peace has not held for long.

Leaner, meaner?

Crucially, consumers, having maxed-out on their credit cards, are borrowing at a slower pace.

FT headline 06/04/2006
Pressure is growing on banks from regulators, customers and the City

Worse still for the industry, banks are having to write-off increasingly large amounts in bad debts, not just in the UK but in their worldwide operations.

HSBC's results for 2006 contained a 5.5bn provision for bad debts, up 35% on the previous year, following problems at its US mortgage business.

"Expectations of bank profits are very high and there is a lot of bid speculation out there, particular relating to Barclays and to a lesser extent Lloyds," says Richard Hunter, head of UK equities at Hargreaves Lansdown stockbrokers.

"Any hint that a bank could be underperforming in any area brings quite sharp share price falls and make it a potential target."

So while customers see greed when telephone-number profit figures are announced, banks are still worried about the prospect of a takeover bid.

"The banks are under pressure to produce big returns and tie up loose ends in the UK," Mr Hunter says.

"What we have seen with moves, such as that taken by First Direct, is a tidying up exercise.

"In the current climate, banks have to be seen to be lean."

Fair warning

But an increasing number of consumers seem to see their banks as just plain mean rather than lean.

For example, the Financial Ombudsman service is getting 1,000 calls a day from people complaining about their bank.

However, according to Robert Skinner, the new chief executive of the Banking Code Standards Board, banks could take some simple steps to improve customer relations now.

"We would like to see banks give customers pre-notification that a default charge is being imposed," Mr Skinner says.

"This should give customers an opportunity to ensure they have sufficient funds in their accounts, which in turn should reduce the number of instances where a single default charge triggers further charges."

He added that a requirement on banks to lend responsibly could help reduce bad debts.

But will this be enough to stop customers revolting?

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