Page last updated at 15:54 GMT, Tuesday, 22 December 2009

Bank charges challenge is dropped by regulator

OFT chief executive John Fingleton: "We haven't given up"

The Office of Fair Trading (OFT) has decided to drop its investigation into the fairness of bank overdraft charges.

It follows last month's Supreme Court ruling that the OFT could not use part of the unfair contract regulations to decide if bank charges were unfair.

However, the OFT said it still had "significant concerns" about the way banks operate current accounts.

More than a million refund claims that have been on hold since July 2007 are likely to be rejected.

The regulator said "fundamental change" was still needed in the interests of customers.

"The OFT has concluded that any investigation it were to continue into the fairness of current unarranged overdraft charging terms under the Unfair Terms in Consumer Contract Regulations (UTCCRs) would have a very limited scope and low prospects of success," the OFT said.

Ian Pollock, personal finance reporter

Despite their legal setback, the OFT and the government are hoping they can still pressurise the banks into making their charges fairer.

This will probably have some effect as the banks are very unpopular and are under intense pressure from the government - which controls several of them.

What will not happen is a mass refund of billions of pounds in past charges, and a mass refund was what the banks were always most afraid of.

Changing the way banks charge in the future should be relatively painless for them.

However, this saga has exposed a big hole in the UK's consumer laws.

The OFT thinks both the scale of bank charges and the way they are levied is unfair.

But it has found it has no legal powers to do anything about them.

"Given this, it has decided against taking forward such an investigation."

BBC's personal finance reporter Ian Pollock said two and a half years of work by the OFT had ended in defeat.

This is a victory for the ability of the banks to set their own charges, no matter how unfair some customers may consider them to be, our correspondent said.

'Voluntary agreement'

Banks levy charges amounting to £2.6bn each year on their overdrawn customers and this makes up a third of their income from running current accounts.

The OFT said the charges were "difficult to understand, not transparent, and not subject to effective consumer control".

"We are committed to securing significant changes to unarranged overdraft charges going forward, whether through voluntary agreement with the banks or by other means," said the OFT's chief executive, John Fingleton.

He threatened to ask the government to change the law if the banks did not co-operate, a stance supported by the Treasury.

"We're working towards a voluntary agreement with the banks, but we don't rule out further action if this doesn't deliver the kind of changes we expect to see," said a Treasury spokesman

"Through the Financial Services Bill we are legislating to give consumers greater powers and protection for the future, including the ability to take a group action through the courts wherever there is mis-selling or abuse on the parts of banks," he added.

The OFT hopes the banks will come to an agreement by the end of March 2010.

Supreme Court ruling

The banks and the OFT first agreed to stage a legal test case in July 2007, to decide if the OFT had the powers to rule on the fairness of bank charges.

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A consumer campaign on the issue had led to hundreds of thousands of complaints which threatened to swamp the UK legal system.

But after the High Court and Appeal Court sided with the OFT, the Supreme Court turned the tables.

The five judges did not rule on the issue of fairness itself.

They decided that the parts of the 1999 Unfair Terms in Consumer Contract Regulations (UTCCR) that the OFT was trying to invoke did not, in fact, give it the powers it thought it had.

The judges said that overdraft charges were part of the price that customers agreed to pay for the package of services their banks provided, and as such were excluded from the scope of the regulations.

New line of attack?

The banks are currently working their way through more than a million complaints that have been stacked up since the test case started in July 2007.

The overwhelming majority are likely to be rejected.

Regulators and watchdogs have taken a terrible beating this year. And the decision by the OFT to drop its investigation into bank charges is another painful blow
Nils Blythe, BBC business correspondent

Thousands of other claims for the repayment of past bank charges, which have been stayed in the courts, may now be reopened at the request of either the banks or their customers, but the chances of any succeeding seem slim.

The OFT also revealed it had decided against launching a different legal attack on bank charges.

It had considered using the Consumer Credit Act, but had concluded it would have little chance of success if it attempted to argue in court that under that law the banks had established an "unfair relationship" with their customers.

"This partly reflects an assessment of the wider repercussions of [the] reasoning underlying the judgement," the OFT said.

"This reasoning will inevitably be influential in guiding the deliberations of any UK court before which the OFT might bring enforcement action based on the concept of fairness."

However the OFT said an individual might have greater chance of success with such an argument "since a case would need to focus on the individual circumstances of each creditor-debtor relationship - including matters relating to the individual debtor".

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