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Last Updated: Tuesday, 11 September 2007, 16:40 GMT 17:40 UK
OFT may compromise on bank case
By Ian Pollock
Personal finance reporter, BBC News

Lloyds TSB branch in Manchester
Lloyds TSB has already changed its overdraft fees
The Office of Fair Trading (OFT) could drop next year's High Court test case over bank overdraft charges, a senior official has said.

But the OFT added it would only do this if the banks offered to cut the charges so much, that it was in the interests of consumers to drop the case.

The court is due to decide next year whether the OFT has the power to rule that bank overdraft fees are unfair.

The eight banks challenging the OFT say it has no jurisdiction in the matter.

On Monday, Lloyds TSB became the first of the big High Street banks to cut some of its overdraft fees, after paying out millions of pounds in so-called "goodwill payments" to tens of thousands of unhappy customers.

Lloyds customers - and those of other banks - have claimed that charges levied for running up unauthorised overdrafts are illegal and unfairly high.

Negotiation

Other banks are expected to copy Lloyds example in coming months.

We will be looking out for what is the best outcome for the consumer
Cavendish Elithorn, OFT

Any such changes will not, on their own, deflect the OFT from its legal action.

But a senior official, Cavendish Elithorn, made it clear that the OFT was open to negotiation on the issue.

"If we do our own financial analysis, and they [the banks] come in with a number that is lower than our analysis would suggest is an unfair charge, there is no need for the court case to go forward," he said.

"We will be looking out for what is the best outcome for the consumer."

But Mr Elithorn did stress that so far there has been no face-to-face negotiation with the banks.

Authority

However, if and when the case goes ahead, the judge will not be asked to rule on whether bank charges are legal or fair.

Lee Coward
Lee Coward is one of the thousands of customers to sue their banks

Instead the judge will have to decide whether the Unfair Terms in Consumer Contract Regulations apply to them.

The OFT believes typical bank overdraft fees come under these regulations, that they are unfair and that it therefore has the power to order changes.

But banks argue that the charges are a core feature of their current account business and so they are not covered by the regulations, they are fair and that the OFT has no powers in the matter.

Agreement

Intriguingly, the OFT revealed that it actually agrees with part of the banks' arguments.

We think the fairness test will still apply
Cavendish Elithorn, OFT

They claim that their charges are not penalties, but are fees for a service - for running a current account while it is in the red.

"In most instances we would probably agree with the banks' arguments that these are not penalties as defined in common law," said Mr Elithorn.

But he insisted that the OFT still believes the charges are unfair - even if they are "fees for a service".

"We think the fairness test will still apply," he added.

All these legal arguments will be novel in the UK courts and are clearly of great importance to both sides.

However a final decision may be more than a year away if the case goes to the Appeal Court and then the House of Lords.

No more free banking?

With the OFT two-thirds of the way through a nine-month investigation into the fairness of overdraft charges, banks are now giving the watchdog their own estimates of how much it costs to run an account in the red and to bounce cheques.

It may be that some banks may charge some customers an annual fee
Cavendish Elithorn

The regulator is about to do its own number crunching to establish what level of charges it believes are unfair.

However, it estimates that fees and charges for going overdrawn without permission bring in between 2bn and 3.5bn a year to the UK banking industry's revenue.

The OFT has denied that the case could lead to the reintroduction of monthly or annual account charges; the end of so-called "free banking" for those whose accounts stay in credit.

"It may be that some banks may charge some customers an annual fee," said Mr Elithorn.

But he pointed out that in contrast to the fees earned from charging for overdrafts, a standard charge of 300 a year, applied to the country's 75 million current accounts, would generate an extra 20bn or so in income for the banks.

"I believe that if the banks tried to extend such charges much more broadly that some other banks would continue to compete quite vigorously to keep free banking," said Mr Elithorn.



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