Current account charges set to fall

Thursday, 07 September 2006 12:00

Current account default charges, which are imposed when people exceed overdraft limits or when cheques bounce, are set to tumble after the Office of Fair Trading (OFT) said it will look into the market.

In April the OFT said that this sort of charge - when applied to credit cards - was unfairly high and demanded that they be reduced to £12 or less.

And in the wake of this, the amount people are paying for missed or late payments on their credit card has fallen by half, the OFT said today.

However, this ruling did not initially apply to current accounts - meaning Britons are still being charged up to £40 for a returned cheque, exceeding overdraft limits, or a standing order/direct debit that cannot be carried out.

As such the OFT said today it will now investigate the level of charges applied to current accounts as well.

The basic principal the OFT is using is that if the penalty charge issued by the bank is greater than the amount of money missing the payment costs the bank, then the charge is unfair.

That means the charge should not exceed the cost of telling the customer they have missed the payment, the direct amount that missing this payment costs the bank, and compensate for any opportunities to make money the bank has lost because the customer did not make that payment on time.

Most consumers would agree that this amount is considerably less than £40 - or even the £12 that the OFT recommended as the threshold for credit card customers.

"The reduction of default charges on credit cards is great news for consumers," said OFT chief executive John Fingleton.

"We are now extending that work to inform ourselves about account default charges."

And this news is exciting consumer groups.

"Which? has long since asked banks to open their books to public scrutiny as we feel that default charges should be proportionate and reflect the administration costs involved," said Emma Bandey, personal finance campaigner at Which?

"They should not be, as they are now, arbitrary figures picked to make the most money out of unsuspecting customers."

However, banks themselves are less convinced that their charges are excessive.

Ian Mullen, chief executive of the British Bankers' Association, commented: "Our members remain of the view that the current account charging system is fair and legal.

"The majority of customers do not pay fees and enjoy free if in credit banking, unlike the vast majority of developed economies."

He added: "The UK market is one of the most competitive retail banking markets in the world, and international research shows that UK banks provide extremely good value for customers.

"Unlike in other countries where customers pay both to have a bank account and for the services they use, in the UK banks provide free banking, including access to free debit cards, free access to ATMs, free use of cheques, free use of direct debits, free internet banking, free telephone banking and the provision of free paper statements."

The OFT's fact-finding exercise is set to take between three and six months, after this the government watchdog will consider whether a further detailed investigation of the fairness of individual bank default charges is needed.

• Tags:
• bank accounts
,
• bank charges
,
• news
,
• overdrafts