Page last updated at 15:59 GMT, Sunday, 6 December 2009

City Diaries: Should we challenge bank charges?

Man looking at a falling graph

This week our City Diarists discuss the Supreme Court ruling on bank charges, the appointment of the new EU Internal Markets Commissioner, and the banker's reaction to the Queen's speech.

These diaries are written by people who work in finance and have had a front row seat as their industry goes through the biggest changes in decades.

They give us regular insiders' updates on the mood in the City of London and the dramatic changes in the world of finance.

LAURA

Laura (not her real name) works for a commercial bank in London

Supreme Court

Withdrawing cash
"The bank charges issue is not over yet"

Despite the Supreme Court ruling last week on unauthorised overdraft charges it is reasonable to expect that this issue is not over yet.

Whilst I agree that charging someone £20 for going 54p overdrawn is particularly punitive, for every instance like this there are repeat offenders who go overdrawn by much more on a regular basis - which is a problem. Likewise, the charges you may rack up for having direct debits or cheques bounced would be notably more than £20 in most cases, so having your bank honour these payments I would think is preferable.

The principle of charging a punitive amount for late or non-payment is an established practice in sectors as diverse as DVD rentals to parking tickets. Consequently I don't really see why financial services are not allowed to charge a punitive fee for unauthorised borrowings. If you think you are going to go overdrawn, let your bank know and it is likely that the fee will be waived or reduced if it is reasonable.

Letters of credit

I have had a growing worry over international finance over the last few months. Since the crunch started, confidence in other banks has been knocked. The most obvious manifestation of this was LIBOR being thrown out of kilter. Whilst this has now settled it only shows the picture of banks operating in the UK. What can't be seen easily is the reduction or extinction of the willingness of banks to accept letters of credit from foreign banks which many customers who export or who have sister companies abroad need to trade round the world.

There are some countries now which have no banks which UK organisations are happy to accept a letter of credit from. Letters of credit are, in simplistic terms, one bank saying our customer is good for the money. This letter says we guarantee that so please let them have the goods and pay after delivery. If your customer then doesn't pay you, their bank has to honour the letter of credit they approved. If your bank doesn't have faith that they would honour that then the whole system falls down. Which it virtually has.

This situation hasn't notably improved for some countries and I think this is a real threat to economic growth to UK Plc next year, as low exchange rates should mean good times for exporters. If they can't get funding, however they won't be able to capitalise on this.

Yet more regulation?

Michel Barnier - new EU Internal Market Commissioner
Mr Barnier's new job will include supervision of the City of London

I was completely incensed over President Sarkozy's comments about his brilliant French colleague Michel Barnier being appointed to the new European Cabinet to sort out the EU's banking sector and the City in particular. I wasn't aware this was their remit and neither was the Chancellor apparently, which is depressing as his government was the one who shoved through the treaty without reference to the public.

The FSA has over the last year been reaching into all levels of banks in the UK with varying degrees of success or cohesion - including the structure and number of middle managers. If we already have sometimes competing requirements from the Treasury, the FSA, the Bank of England and now the European Commission exactly how is our industry a) meant to square the circle, b) know which master we are answerable to, and c) stop navel gazing and start lending?

MARK

"Mark" (not his real name) works for a stockbroker outside London.

Bank statement showing overdraft charges
"We have to change our attitude to spending outside of means"

The ruling from the Supreme Court on bank charges has caused uproar and cheer in equal measures. I must admit, I think they are right and I think that this was a popular cause only because of the TV exposure the likes of Martin Lewis, the self-styled "Money Saving Expert", got on daytime television. I do wonder if he will be so prominent when people had banked on a different ruling are now facing increased charges (as they did not pay previously) and possibly legal costs?

A number of people seemed to forget that these were charges the customers agreed to. It was in their contract that they were asked to read and to sign, in return for free banking. Had the ruling gone against the banks, and therefore, for those that had signed the contract and then decided it was unfair, we might all have faced the prospect of paying for banking. This would affect everyone with an account, not just those that overspend.

People seemed to forget that these were charges the customers agreed to

I have written in past City Diary entries that we have to change our attitude to spending outside of means. Had the ruling gone in favour of the consumer, it would have encouraged people, in the same way as cheap credit, to overspend. Economies need credit but not bad debtors. I realise that this will not be a popular opinion and that in some cases, genuine people have been stung. I once got caught out when a forgotten direct debit came out a day before pay day. It would have pushed me past an overdraft limit. One quick call to the bank, overdraft extended by the required £25 pounds and no charges. A similar story with a colleague at work, but they had heard all about the challenge to charges and did not bother contacting the bank because "they will have to refund me in the future". £35(ish) charge later, I wonder if they wish they had made the call?

I often watch football on Sky Sports. I pay an agreed subscription price to Sky for the service. Do I have the right to challenge this if I don't think it represents the true cost? Energy costs are constantly in the headlines. Do I have a right to challenge my supplier and tell them I want costs refunded? If Martin Lewis started a campaign, we would probably think we could. I realise banks are slightly different and that they are an essential service, but I never understood why we felt they should be challenged. Had those that have got into difficulties with charges spent as much time and effort reviewing their finances as they have done complaining, we might never had needed the legal challenge in the first place.


ANTHONY

"Anthony" (not his real name) works for an investment bank in the City.

Gordon Brown and David Cameron
"The Financial Services Bill is not necessary"

David Cameron called this year's Queen's speech "shameless".

In other words, it was politically motivated. The Financial Services Bill referred to in the speech is no exception. It is not necessary and therefore can only be for the benefit of the voters as we prepare for a general election.

Why is it unnecessary? At the risk of sounding like a stuck record, controlling bankers must be achieved by international consensus. Proposals to limit bankers' bonuses are already being passed through the European Parliament and on a global level through the Financial Stability Board with a direct line to the G20 leaders and the Basel Committee of Banking Supervisors. This will lead to an amendment to the Basel Accord which is an internationally recognised set of rules governing banks capital adequacy.

EU ignored

A consistent set of rules means that the City will not be adversely affected. Even Switzerland follows the Basel Accord and will follow rules on bankers' bonuses.

I am staggered how the government is systematically prepared to destroy London as the world leading financial centre

What is ironic is that we are signed up to the Lisbon treaty and yet we are not prepared to wait until the European laws are passed. This is not the only area in financial regulation where the UK is ignoring EU procedure and proceeding along its own more accelerated process. Liquidity and large exposures are two areas where for a time regulations will be more onerous in the UK than the rest of the world.

The UK proposals are not thought through. Tearing up contracts is I think open to legal challenge. On the other hand, the changes to banking law proposed in Brussels and Basel consider the whole picture and not just headline bash a banker laws. The new international law will not only restrict bonuses but severely reduce the capacity for bankers to take unnecessary risks. This is because business such as securitisation, where all the problems started in the first place, will require much more capital to the extent that the business may no longer be profitable.

Queen Elizabeth II and Prince Philip walk through the Royal Gallery in Westminster on 18 November 18 as the Queen prepares to address the State Opening of Parliament
"The new banking law will require banks to hold substantial additional capital"

In addition, the new banking law will raise requirements for the banks to hold substantial amounts of additional capital by making them save capital for macroeconomic events like the recession we have just experienced. Countercyclical buffers will also be required which in effect makes banks put capital away for a rainy day. The law will also address issues like the fiasco in Iceland where the FSA had to defer to the Icelandic regulator for matters conducted by Icelandic banks in the UK.

Damage to UK economy

To be frank, I am staggered at how the government is systematically prepared to destroy London as the world leading financial centre. The damage that this will cause to the wider UK economy cannot be underestimated.

Let me give you an example. A good friend of mine, who runs a business up North which employs over 12 people, just had his bank facility pulled by a well known, government owned bank without warning. He had a viable business but unfortunately due to some bad debts brought about by the recession was now making a loss. The increased capital requirement that banks must post has made the bank deem this exposure to be too risky and as a result, unlike British Airways who also made a loss this year, my friend was unceremoniously dumped.

In the end the stringent rules imposed on banks is why first time buyers cannot get mortgages without very large deposits and why small businesses like my friend's are failing.


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