SAGA — Doing things properly

Banks brought to account - 01/08/07

Britain's leading banks have agreed to go to court with the Office of Fair Trading to find out what constitutes a fair penalty charge - and it's about time, writes Holly Thomas

It's incredible that this issue has been left to run for so long given the amount of money we're talking about here.

HSBC announced this week that it has paid out a massive £120 million to customers that have challenged fees, in the last six months alone. Lloyds TSB had paid out £36m during the same period.

The test case at the High Court will see one argument that these fees - of up to £39 for the likes of exceeding overdraft limits or having insufficient funds to pay cheques or direct debits - should reflect only what it costs the bank to deal with. Some argue this is as little as £2.50.

The banks have attempted to defend their fees, claiming they represent "service charges". Yet they have still paid out to the thousands of customers who have threatened them with legal action. Take this example: A NatWest customer exceeding an agreed limit by £60, with three £20 guaranteed cheques paid out in a month would penalise cost £133 - more than double the unauthorised amount borrowed.

Customers issued a bill for this kind of money - which could buy you a round-trip to Paris on the Eurostar - could be forgiven for feeling totally ripped off.

It is very difficult to believe that it has cost this bank £133 to "service" this scenario. Campaigners have argued that, under UK law, these penalty charges - applied when customers breach the contract they signed with their account provider - are unfair.

Until the case is concluded, many of those with complaints still in the pipeline are going to have to wait until the case is finished to hear if they are to get any of their money back.

The city watchdog has put a freeze on banks and complaints handlers dealing with complaints until the courts have issued a judgment. The Financial Services Ombudsman is also suspending work on claims.

However, any refund offers already made to consumers will be honoured if they choose to accept. So there's a gamble. Either take the money and forget about it, or hang fire and hope that the court rules that refunds should be made in full.

The FSA has ruled, under the terms of the waiver which allows claims to be shelved, consumers have two months to decide whether they want to accept any offer made.

So there's no need for people to rush into a decision.

The test case will involve Abbey National, Barclays, Clydesdale, the HBOS group, which includes Halifax, HSBC, Lloyds TSB, the Royal Bank of Scotland Group, which includes NatWest, and Nationwide Building Society.

Whatever the outcome of this test case, it will without doubt have a huge impact on the banking system in this country, since these big companies are unlikely to take any profit losses on the chin. Many commentators have predicted the end of free banking in the UK.

A verdict is not expected until next year, so for now, we can just sit back and wait for the fireworks.

Holly Thomas is Deputy Personal Finance Editor at the Daily Express and Sunday Express. Holly's views represent her own opinions and are for general information only. Always seek independent financial advice.

Paul Lewis is away