Page last updated at 14:19 GMT, Thursday, 29 May 2008 15:19 UK

Are banks set to capitulate over fees?

Analysis
By Ian Pollock
Personal finance reporter, BBC News

Barclays customer
Some customers will pay less for their overdrafts

The UK's banks have spent more than two years asserting vehemently that their overdraft fees were fair and just. Now the dam seems to have burst.

One of them, Barclays, has slashed its overdraft charges to just 8.

This is even less than the 12 default fee which all banks were forced to accept for their credit card customers in 2006.

Campaigners and consumers groups claim that Barclays' change threatens to undermine the defence of the entire banking industry in the forthcoming High Court hearing over the fairness of its charges.

The Office of Fair Trading (OFT), which has been challenging the banks over their fees, is not making any comment on this latest development.

But it must be fascinated by this turn of events.

One of the leading campaigners against bank charges, Marc Gander of the Consumer Action Group, was not so reticent.

"This move by Barclays dishes their own case," he said.

"Maybe they hope the whole issue will be dropped by the OFT."

And Chris Warner, a lawyer at the consumers' association Which?, said: "This does seem to be an admission by Barclays that its current unauthorised overdraft charges are unfair and that instead, a fee of 8 would be reflect its costs and so be a much fairer price."

Adverse ruling

Barclays says all this has nothing to do with the continuing litigation and that it has simply responded to its customers' needs.

This does seem to be an admission by Barclays that its current unauthorised overdraft charges are unfair and that instead, a fee of 8 would be reflect its costs and so be a much fairer price
Chris Warner, Which?

Specifically, the complaints of those who felt they were being clobbered unjustly if they went into the red briefly, or by accident, for instance, just before a salary cheque was due to arrive.

But despite claims to the contrary by Barclays, it is obvious that its new fee structure for overdrafts is in anticipation of an adverse ruling in the courts.

In April, Mr Justice Andrew Smith ruled that under consumer contract regulations, the OFT had the right to decide if bank overdraft charges were fair or not.

The banks are going to appeal against this in the Appeal Court.

But last week, the judge also prodded both sides into agreeing that another hearing, directly on the issue of fairness itself, should start before the end of this year, unless both the OFT and the banks could agree a deal before then.

Clearly the banks, or at least Barclays, have seen which way the wind is blowing.

The chances must be high that others, such as Lloyds-TSB, RBS-NatWest and HSBC, will copy it in some form or another.

What then?

This would surely lay the ground for the banks and the OFT to decide that further arm-wrestling in the courts about the current overdraft charges was a waste of time.

Mr Justice Andrew Smith
Mr Justice Smith will still have to make some vital rulings

But it would not settle the matter entirely.

In July, both sides pitch up before Mr Justice Andrew Smith again.

This time, it will be to argue whether the overdraft charges levied in the past, under old terms and conditions, can also be challenged by the OFT.

How will the banks defend the validity of their past charges if they now have a new set of fees which they say are fairer and better?

It is worth remembering that tens of thousands of claims are currently in suspense in the county courts and at the Financial Ombudsman Service until the whole issue is resolved.

And billions of pounds of potential new claims for the refund of overdraft charges could emerge if the banks eventually lose their argument on the fairness of their old terms and conditions.

Yet in most cases, where the banks have submitted written defences to county court claims, they argued explicitly that their charges were a fair and accurate reflection of the real cost of bouncing a cheque, plus the cost of writing a letter to customers telling them about it.

That argument will be hard to sustain if those very same charges have now been slashed, under the guise of being more responsive to customers' needs.

Charging for accounts

Barclays' new fee structure does not mean that going into the red without permission now carries a relatively negligible cost.

High Court in London
The High Court, scene of the battle between the banks and the OFT

Someone who does this once a month will now be charged 22 for using the new "personal reserve", whereas the cost might previously have been 30 or 35 a go, depending on whether the cheque was paid or bounced.

Someone who gets lots of cheques bounced in one day may also now be charged up to a maximum of 40 instead of 35.

But the underlying theme of the Barclays changes is not just to do with overdraft fees.

It is also about revamping the whole structure of its current accounts, by encouraging customers to opt for ones that carry a simple monthly fee.

Many banks have, in the past year or so, brought in such accounts with monthly fees, often touted as a luxury option, with frills such as insurance.

But Barclays now has an optional new current account, dubbed "current account plus", which offers a 300 interest-free overdraft for just 3 a month.

That would be cheaper to use than occasionally dipping into a "personal reserve".

Many commentators have said this is the way that UK banking would go if high overdraft fees were restricted - back to the days of charging customers for having an ordinary account.

It is happening right now.



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