Page last updated at 16:14 GMT, Friday, 29 August 2008 17:14 UK

OFT says bank charges are unfair

Mr Justice Andrew Smith
Mr Justice Andrew Smith will soon deliver further rulings on bank charges

The main UK banks have been told by the Office of Fair Trading (OFT) that their overdraft charges are probably unfair.

The OFT's view is revealed in a confidential memo circulated among senior staff at RBS/NatWest.

The regulator tells RBS it has "serious concerns" that its overdraft terms might be unfair to its customers.

In April, the High Court, in the first of a series of legal rulings, said the OFT had the right to scrutinise the fairness of the banks' current charges.

In one of the biggest consumer revolts of modern times, hundreds of thousands of claims for the refund of bank charges were lodged by aggrieved bank customers in county courts up and down the country, and with the Financial Ombudsman Service (FOS), in the course of 2006 and 2007.

The customers complained they had unfairly been overcharged hundreds, and sometimes thousands, of pounds when falling into the red.

"Serious concerns"

The OFT wrote in the middle of August to all the banks whose terms and conditions it had been scrutinising.

It has told RBS that it has "serious concerns" that the terms may be unfair
RBS internal memo

At that stage all it would say in public was that "at this stage, no bank's terms have been given a clean bill of health and all banks remain under investigation."

"The purpose of the letters is to start a dialogue with each bank to enable us to reach final conclusions as to whether the terms are unfair, and to identify which issues may need to be resolved in court proceedings," the OFT said at the time.

The leaked RBS/NatWest memo makes it clear what the OFT really thinks.

''The OFT has written to the test case banks with its preliminary views on the fairness of administration charges terms," says the memo.

"It has told RBS that it has "serious concerns" that the terms may be unfair.

The memo states that "RBS is considering its response. This is a key step towards phase 2 of the test case, which is not due to start until early 2009''.

Nick Spooner, of the campaigning website Legal Beagles, said the OFT's view was inevitable.

"The OFT would not have spent all this time investigating the issue if it did not believe the charges were unfair," he said.

"But I believe the OFT should now make public the fact it thinks the charges are indeed unfair," he added.

Many hearings to come

The OFT has been investigating the fairness of these controversial bank charges since April 2006.

But the growing deluge of court cases led, in July 2007, to the banking industry coming to a deal with the OFT, FOS and the Financial Services Authority (FSA).

All current and new bank charge cases would be put on hold until the underlying legal issues had been thrashed out in the courts.

That eventually led to the OFT's initial High Court victory in April.

In an increasingly complicated set of litigation, there are at least four more High Court decisions to come, with more if there are any appeals.

  • this autumn Mr Justice Andrew Smith will rule if the OFT can also scrutinise the fairness of the historic terms formerly used by banks for their overdraft charges in the past
  • he will also rule if any historic bank terms are unfair penalties under common law, as well as potentially under the 1999 Unfair Terms in Consumer Contracts regulations
  • in October there will be an appeal by the banks against the OFT's initial High Court victory in April
  • and in late 2008/early 2009, a High Court hearing is expected to start on the substantive issue of whether or not bank overdraft charges are unfair - in effect a challenge by the banks to an anticipated adverse ruling by the OFT.

Ray Cox, a leading banking QC, said: "If this opinion of the OFT is confirmed with regard to the current charging structure, it is difficult to see how the banks will be able to have a system resembling their current overdraft charges at all."

An RBS spokesman replied that the OFT's letter was just the start of the next phase of the ongoing litigation.

"The OFT's conclusions will be tested by the court," he said.

After a parallel investigation into the operation of bank current accounts generally, also launched in April 2006, the OFT concluded last month that they were "not working well for consumers".

It pointed out that overdraft charges generated an income of 2.6bn a year for UK banks, and that much of this money was "derived opaquely" from customers.

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