High Court will decide on bank overdraft charges

Finance

The future costs of banking for British consumers could be decided this week as the Office of Fair Trading and some of Britain's biggest banks lock horns in the High Court over overdraft fees. The outcome could have a significant effect on how much we all pay for our banking.

The charges imposed by British banks for overdrafts have been a source of controversy for a few years now. And with some banks charging up to £30 for overdrawing without permission, that is hardly surprising.

In fact, the rates have prompted a wave of litigation over the past couple of years that have seen the banks refund over half a billion pounds to about 330,000 British consumers. However, these claims have always been settled out of court so there is no precedent as today's court proceedings get under way.

In light of the huge number of claims against the banks, it was decided last summer that the issue needed to be resolved by a High Court ruling. The proceedings are expected to take at least one week and at this stage it is difficult to predict whose side the High Court judge will take.

The Office of Fair Trading (OFT) argues that the penalties for unauthorised overdrafts are extortionate on the basis that they are significantly higher than the true administration costs. This, it claims, is in breach of the 1999 Unfair Terms in Consumer Contracts Regulations.

The OFT also claims that the banks' terms and conditions are difficult for consumers to understand. If the High Court judge rules for the OFT on one or both of these issues it will give the OFT the power to decide for itself on whether a bank's charges are unfair.

On the flip side, the banks argue that fees for unauthorized and authorized overdrafts are a service charge, and not a penalty, so they should be allowed to charge what they want.

As mentioned, the current proceedings will probably take at least a week until we get a ruling. Even after that, we are likely to see an appeal from the losing side so this could drag on a bit.

So what does all of this mean for the consumer? Well, you can still make a claim against a bank if you wish but they are not processing any claims at the moment while the current proceedings are ongoing. What will happen to your claim after that will depend on the outcome of the current proceedings.

If the High Court sides with the OFT, the current high overdraft penalties will most likely be scrapped. Not only this, British consumers could be in line for billions of pounds in refunds if the overdraft penalties are found to be illegal.

However, there could be a downside. If the banks lose this income and are forced to pay back billions of pounds this will inevitably be passed onto consumers in one form or another. Some analysts predict that the days of free current account banking will be numbered if the High Court sides with the OFT.

If the High Court sides with the banks, then things are likely to remain the way they are. Though it is unlikely the banks will have to settle any future claims against overdraft penalties.

In this case, the best advice for consumers is to avoid overdrafts if at all possible. If you can stay in the black you can enjoy free banking with most banks.

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