Page last updated at 11:03 GMT, Tuesday, 22 December 2009

Q&A: Bank overdraft charges

Money being withdrawn from cash machine
The banks are still under pressure to change their charges

The Office of Fair Trading (OFT) has given up on its attempts to use the law to restrict the way banks charge people for unauthorised overdrafts.

It is a decision that affects everyone with a bank account.

It also has big implications for the ability of banks to charge what they like for their services.

In a nutshell, what has been decided?

After nearly three years of trying to use the law to attack the scale of bank charges, the OFT has thrown in the towel.

Last month, the Supreme Court told the OFT that it could not use part of the 1999 Unfair Terms in Consumer Contract Regulations to challenge the fairness of the charges.

And after spending the past few weeks thinking about it, the OFT has decided that trying to use other consumer laws would be unlikely to succeed either.

So what will happen then?

The OFT will be talking to the banks to persuade them to reduce the scale of their charges anyway.

If the banks do not play ball, they face the threat of the government changing the law to force them to comply.

We should know by the end of March if this route will lead to any change.

Why should the banks comply when they have just won the legal battle?

When the legal test case started in July 2007 everything looked rosy for the banks, who were making big profits.

Since then things have changed. Several have had to be partly or completely nationalised, and the whole industry has been kept going thanks to billions of pounds of public money.

Not only are the banks very unpopular with the public, the government has its hands on their throats, or at least on their tills.

So it is very much in the banks' interests to agree to changes.

Won't that cost them lots of money, which they don't have?

Not necessarily. They could easily agree to cut the level of their overdraft fees and try to make up the difference elsewhere.

Some banks have already done this, notably RBS-NatWest and, for its mortgage customers, Santander.

What the banks have avoided is being told to repay billions of pounds in past charges to millions of customers, going back over possibly more than 10 years.

That was the truly horrible prospect they have succeeded in defeating.

Will bank customers be pleased or disappointed?

In any one year most bank customers - 42 million - do not run up unauthorised overdrafts.

Their ostensibly free current account service is subsidised by the high fees the banks levy on those who go into the red without permission.

On the face of it a minority of bank customers - 12 million - will be disappointed but most will be pleased.

How can I avoid fees if I go into the red?

Simple. Contact your bank and ask them for an arranged overdraft facility.

That will be much cheaper than going into the red without permission.

You might also find it worthwhile to shop around, as the fees charged for unauthorised borrowing are starting to vary rather more than before, from bank to bank.

I asked my bank for a refund of past charges - what is happening?

After the Supreme Court ruling the Financial Services Authority told all the banks they now had to start processing these complaints.

This may take some time as there were more than one million of them.

They are almost certain to be rejected with no money forthcoming.

I had a claim stayed at my county court - what is going on there?

Either you or your bank will have to write to the judge asking them to hear the case.

If your claim used either of the two main arguments on which the OFT was defeated then your claim will probably be lost too.

Those arguments were that bank charges were unfair under the 1999 Unfair Terms in Consumer Contracts Regulations, or were unfair penalties under common law.

If you have the will to carry on though, the OFT suggest you might, possibly, be able to argue that the charges are unfair under the provisions of the Consumer Credit Act.

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