Apr
24
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The UK’s biggest banks are bracing themselves for defeat in the High Court test case about overdraft charges.Mr Justice Andrew Smith will hand down his judgement later on whether or not the Office of Fair Trading (OFT) can rule that bank charges are unfair.
If the OFT wins, it is then expected to decide that bank charges are too high.
Since the beginning of 2006 hundreds of thousands of bank customers have tried to reclaim their charges on the grounds that they were too high and unfair.
Test case
Both the banks and the courts were deluged with claims which they were finding very difficult to deal with.
But since both sides agreed to stage the test case, tens of thousands of claims have been put on hold in either the county courts or with the Financial Ombudsman Service (FOS).
It is important to note that the test case will not decide whether overdraft charges are fair or not
Consumers’ association, Which?
Q&A: Bank charges
Analysis: Test case
Why I took my bank to court
“A decision in favour of customers would be massively significant,” said Marc Gander of the Consumer Action Group.
“Public confidence in the banking system is at an all-time low,” he added.
The BBC has estimated that last year the banks refunded about £784m to nearly 378,000 customers.
‘Snowballing situation’
Paul Tilley, a law student from Southampton, was one of those customers.
He says he won back £4,000 including interest after his bank imposed charges for exceeding his overdraft limit.
He has an outstanding claim with another bank and hopes the test case will force banks to change their behaviour.
“Looking at my statements from the time, they were taking up to £180 a month off me in charges, it then left me short for paying my bills.”
“As a result my payments bounced, I then went over my overdraft again.”
“It was a snowballing situation.”
Outcomes
The OFT first agreed last July, with seven banks and the Nationwide building society, to stage the test case to decide if it had the power under consumer contract regulations to regulate overdraft charges.
The issue of the OFT’s jurisdiction was then thrashed out during 14 days of complicated High Court hearings in January and February.
The consumers association Which? said there would be three possible outcomes to Thursday’s judgement.
An outright win for the OFT. The court could rule that all terms and conditions for all the test case banks over the last 6 years can be assessed for fairness.
An outright win for the banks. The court could rule that none of the terms and conditions used by any of the test case banks over the last 6 years can be assessed for fairness.
Something in between. The court might decide that some terms and conditions are subject to fairness assessment, while others are not.
“It is important to note that the test case will not decide whether overdraft charges are fair or not,” said Which?
Further hearings?
Further High Court hearings after Thursday’s judgement to decide the exact level of charges, could lead to further delays for hundreds of thousands of claimants.
One senior banker involved in the proceedings told the BBC: “We are preparing for every possibility.”
But he argued that an initial defeat on the issue of the OFT’s jurisdiction would simply lead to a second round of cases on the precise nature of the “fairness”, or otherwise, of bank charges.
And that would be separate from any possible appeal hearing against the first judgement.
Describing subsequent hearings as “substantial” and likely to go on into next year, he said “we have agreed to act with all speed”.
Free banking
As well as deciding the narrow legal issue of jurisdiction, Mr Justice Andrew Smith and the various parties to the hearing will have important consequential issues to decide.
Will his ruling affect the banks’ historic terms and conditions as well as their current ones?
What guidance should be given to county court judges and the Financial Ombudsman Service about the backlog of cases that have been kept on hold?
Should the Financial Services Authority lift its “waiver” which has let banks keep new claims on hold?
At stake is not only the ability of aggrieved customers to reclaim their charges but also the ability of the banks to generate an estimated £3.5bn a year in profits from levying them.
If the banks eventually suffer a complete defeat on the issue, then it has been widely predicted that they will try to recoup their losses by abandoning the long standing policy of so-called “free banking” for customers in credit.
Instead, monthly or annual charges could be introduced as standard for running an ordinary current account
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