There is disppointing news on bank penalty charges today. The OFT have decided to abandon the legal challenge on bank charges fairness. This follows the Supreme Court ruling that said that the specific part of the law they were claiming would allow them to decide on fairness, did not actually apply.

It is a blow for protection of consumers and raises an interesting question. What is the point of the OFT? The title says it all. The OFFICE OF FAIR TRADING. If the OFT cannot rule on what is fair then what is the point of their existence? Either they need to have their powers increased so they are able to rule on what is considered fair or not, or they should be disbanded and the government state plainly that they do not consider it matters whether trading is fair or not.

Prior to this court case the banks paid out millions as refunds to their customers for bank charges that had been applied to their accounts. If the banks believed they were fair charges and they were entitled to them then we, as taxpayers who are now major shareholders in several banks, are entitled to ask why the banks were paying out all these millions of pounds for no reason. If they felt they had a case that the charges were indeed fair they had no reason to repay the charges, so why did they pay out? Surely that represents bad management by the banks.

There are some interesting figures in the documents released by the OFT in relation to their abandoning this case. They say they still believe the charges are unfair but they seem concerned that the legal bill of fighting on could be excessive if they were to lose and be required to pay the banks legal fees. This is undoubtedly true as the banks would spend a fortune on a legal team that was composed of the best legal minds available. That says an awful lot about the legal system in this country. You can only get justice if you have pockets that are deeper than the OFT’s. What chance does the ordinary man in the street have of getting justice when legal fees are such an obstacle?

The OFT talks about the profits generated by penalty charges and shows clearly just how exorbitant they are:-

Paid item and maintenance fees totalled some £1.5bn – which would equate to a return of over 220 per cent on the average balance

A 220% return on the average balance? No wonder the banks fought so hard to retain the right to make so much money so easily.

A lot of people are quick to say that it doesn’t matter what the charge is and that if people are willing spend other people’s money going overdrawn they should pay the price. This misses the point completely.

In many, if not most, cases people are not trying to spend other peoples money. If you phone up the bank and ask them not to pay anything that would cause you go overdrawn they basically tell you to get stuffed. They tell you they are helping you by making the payments. They use the argument that it could be a mortgage payment so they are doing you a favour by paying it. You do not have any option in the matter. They decide to pay and they then make charges on your account. What would be so wrong with giving the customer a choice over whether anything gets paid or not if you do not have the money in your account?

When direct debits go unpaid no money is spent yet the bank may apply a charge of £35 for doing nothing and if it costs the banks £35 to send out a computer generated letter to a customer, as they always claim to be the case, then the banks must be the most inefficient organisations on the planet and their shareholders should be holding the management to account. If it were true why do some banks only charge maybe, £12 for a letter when you go £12.50 overdrawn or £20 when you go £22.00 overdrawn.

People say they don’t want to see the end of free banking and they are fed up with people who want to take advantage of the people who stay in the black with their accounts. What they are not seeing is that they are the ones taking advantage. The free banking is a myth that is only made possible by other people paying for your free account. All those people suffering excessive charges are paying for the cost of your free banking as well as the cost of their own accounts. This cross subsidy is at the heart of the argument.

Is it is fair that people who are, presumably, very short of money should have to pay the banking costs of people who are much better off. It goes against everything we believe about a fair society where the better off help support those who are less well off. Nobody is even asking for that idea to be applied in the case of bank charges. What is being asked is that people should only be expected to pay the true cost of running their own bank account and that is something everyone should consider fair.

Money Magic: Seven Simple Steps to True Financial Freedom (Quick Reads)

The long awaited announcement of the ruling by the supreme court, formerly the law lords, on the question of whether the OFT could test the fairness of bank charges was given this morning and it came as a considerable shock to many thousands and perhaps millions of UK citizens.

The judgement was that on the very specific and precise ruling that was required as to whether the OFT was entitled under the law to investigate if bank charges were fair, it was not.

This will be a great disappointment to millions of people around the country who believe that bank charging systems are totally unfair in that people who may be struggling financially to meet their bills are being required to subsidise those people who are able to maintain their bank account for free thanks to the these payments.

Several comments by the Judges make interesting reading.

Lady Hale stated that it might be open to question whether it is fair to subsidise some customers whose accounts always remain in credit by levies on others who experienced events they did not foresee when they opened their accounts.

Lord Walker pointed out that banks accepted that “the system of “free if in credit” banking prevalent in
this country involves a significant cross-subsidy (amounting to about 30 per cent of the
banks’ total revenue stream from current account customers) provided by those customers
who regularly incur charges for unauthorised overdrafts (a cohort, we were told, of the
order of twelve million people) to those customers (a cohort of about 42 million people)
who are in the fortunate position of never (or very rarely) incurring such charges.”

There seems little doubt that while the ruling on the technical issue of whether the law allowed the OFT to investigate the fairness of the bank charges has come down in favour of the banks the story is not over yet.

The ruling pointed out that while this specific point did not allow the OFT to investigate there may be other avenues open to it to investigate under and the OFT have responded by saying they will study the ruling and consider what options are available to them.

There is clearly huge public concern about bank charges and penalty fees. It is clearly unfair that people who have difficulty meeting their bills are being taken advantage of in order to subsidise people who are able to afford their bills. Nobody is suggesting that it is a good thing for anyone to go overdrawn beyond their agreed limits but the way the banks operate so that they can screw the maximum out of people who are already struggling and push them further into debt is immoral and should be illegal.

The government should act and they could act today by demanding that the banks that are majority owned by the taxpayer act in a moral and fair way towards their customers. The ruling by the supreme court raised questions about the fairness of the way the banks operate and it is only reasonable to expect action by the government to enure that the public are treated fairly and honestly by the banks.

Money Magic: Seven Simple Steps to True Financial Freedom (Quick Reads)

In an interesting development ahead of the soon expected ruling from the new supreme court on whether the FSA can challenge the fairness of bank charges and fees, one bank has announced a new account that will not make apply a fee for unauthorised overdrafts or bounced payments.
This has clearly been in the planning process for some considerable time and it seems unlikely that mere coincidence is the reason for this announcement only days before the supreme courts decision is announced.

Santander will offer the new bank account from January 2010 to their mortgage customers. The account will have an interest charge of 12.9% applied to overdrafts regardless of whether it is an authorised or unauthorised overdraft.
In offering a fairer and more honest way of charging customers Santander are likely to attract customers who are sick to death of the way charges have previously been applied. Unless other banks respond they can expect to lose customers to Santander though the fact that the bank account will only be offered to mortgage customers will limit the numbers of applicants.

It is a shame that it has taken so long for the banks to start thinking about their customers and it has taken a long running court case to move forward but it would seem that we are seeing the beginning of a fairer and simpler way of managing bank accounts and for that we should be thankful.
It will take a long time for the banks to earn any respect from customers and we know they cannot be trusted to care about their customers but this would seem like a good start from Santander.

Money Magic: Seven Simple Steps to True Financial Freedom (Quick Reads)