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Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

Have you ever been at the wrong end of a penalty charge, imposed by your bank, for a letter sent about a breach of your overdraft limit or a bounced cheque? Thousands of customers have had this experience and now the mood is turning from anger to revolt about the scale of these charges.

Estimates of the UK banks’ earnings from penalty charges vary widely but The Times puts the figure at close to £5 billion per year.

Some groups are claiming that the charges are unlawful, being set at levels that breach the 1999 Unfair Terms in Consumer Contracts Regulations (UTCCRs). Mike Dailly of the Govan Law Centre, supported by Citizens Advice in Scotland, claims that banks can only recover the amount of money they have actually lost as a result of a customer doing something wrong – they cannot impose penalties or fines.

Activists have pointed to the report on credit card charges by the Office of Fair Trading (OFT) in April 2006. This recommended a maximum for default charges of £12. In examining what is a fair level, the OFT reviewed not only the UTCCRs but also the legal precedents covering damages for breaches of contract. The OFT concluded that "default fees have been set at a significantly higher level than is fair for the purposes of the UTCCRs".

"UK banks could earn £5 billion a year from penalty charges"

The Consumer Action Group, a consumer body promoting action against bank charges which has over 13,000 members, claims that the OFT’s findings on credit cards set a precedent for penalties for bank account breaches. Indeed, the OFT itself said that it expects the principles it had used to be applied to other bank charges. The Group recommends that customers take action in the small claims court to reclaim excess charges.

Martin Lewis of moneysavingexpert.com – where the bank charges discussion board has notched up 41,000 consumer postings – claims that we are seeing a consumer revolution, with thousands of customers demanding refunds.

A number of sites advising on the reclaiming of charges, going back up to the maximum of six years allowed under the 1980 Limitation Act, now exist on the internet. Many customers have already been successful in reclaiming bank charges - such as Laura Saunders of St Ives in Cornwall who successfully challenged the Yorkshire Bank over charges amounting to £922 in a County Court ‘test case’ in 2005.

Such successes to date may, though, simply be attributable to the banks’ failure to defend the actions.

So are the customers who incur these charges at the wrong end of a banking ‘rip-off’? Not so say the banks. They disagree with the OFT’s legal reasoning on credit card charges and they, along with the British Bankers’ Association, reject the notion that the same principles apply to other bank charges. Notification of contract terms is supplied to customers and the banks claim that charging for breaches of the contract terms is lawful.

And as regards the scale of the charges – the banks say it represents the appropriate economic costing for the action being taken. So says Ian Mullen, Chief Executive of the British Bankers association (BBA), who claims that the process of dealing with customers who have breached overdraft limits involves manual intervention – and is not just computer processed – with the result that the charges levied reflect the costs actually incurred by the banks.

Additionally banks would argue that, elsewhere, they do not charge customers for the economic costs associated with their bank accounts. For example, close to 95% of ATM transactions are still free - in contrast to the United States where around 40% are charged. In many parts of Europe customers pay an annual fee of as much as €50 for the provision of a bank account .

So what does the future hold for these bank penalty charges?

Currently the OFT is investigating whether it should now impose a cap on unauthorised overdraft charges. Some banks, perhaps in reaction, are now considering re-introducing charges to customers for providing bank accounts as this would help to claw back the lost earnings if overdraft charges were to be capped.

In November 2006 First Direct, the online banking arm of HSBC, announced that it is planning to introduce a £10 monthly charge for all customers who neither place a minimum of £1,500 of earnings into their account each month nor hold a minimum average balance in the account of £1,500.

So the outcry about overdraft charges could end up triggering the end of free current account banking in this country.

Further reading

• Are penalty charges bank robbery? – The Money Programme investigates penalty charges
• Calling companies to account – big business has a reputation for abusing its power, so how can we call companies to account?
• New Fees signal an end to free banking in The Times on 15th November 2006
• Calculating fair default charges in credit card contracts: A statement of the OFT’s position, OFT842 April 2006
• Nationwide warns MPs of threat to free cash machine network – Nationwide press release 10th February 2005
• Personal Finance edited by George Callaghan, Ian Fribbance and Martin Higginson, published by John Wiley & Sons
• The Consumer Action Group
• Govan Legal Centre bank charges campaign
• Martin Lewis's Moneysavingexpert website

About the author

Martin Upton is lecturer in finance at the OU Business School. Previously he spent 20 years in treasury management, including 12 years as Treasurer of Nationwide Building Society. Martin's particular interests are financial services, the housing market, financial markets and risk management.

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Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

The Great Phone Call Con looks at the problems of phone-line fraud and unsolicited telephone marketing. This made me wonder, why has there been an explosion of this sort of fraud, and why do they seem to find it so easy to fool us? The answers to both questions may lie in the nature of human psychology.

Why the massive surge in telephone fraud?

Fraud requires a supply of victims, weak safeguards and motivated crooks. Changes in technology have increased access to potential victims. It’s relatively cheap and easy to set up machines to communicate with people. It’s also possible to obscure the trail back to the fraudster. The widespread use of electronic money exchange (online banking, credit card use, etc) also makes it easier – by making it easy for us to part with our cash. Safeguards are poor; law enforcement has struggled to keep up with these new forms of fraud.

However, I don’t think the availability of new means of fraud, alone, is sufficient to explain why there is so much fraud going on. An important aspect of the recent surge in telephone and internet crime seems to be the seemingly endless supply of fraudsters.

Successful fraud requires both a set of skills and a willingness to deliberately target and deceive others. The most successful fraudsters have a capacity to look us in the eye, to engage our trust and then betray it without a qualm. This capacity is actually quite rare and often associated with personality disorder (or perhaps politicians?!).

Typically, those committing fraud use psychological strategies to distance themselves from any sense of guilt. Criminologists refer to this as ‘neutralisation’. A common form of neutralisation is to view the victim as in some way to blame – “He had it coming; I couldn’t have taken him in if he wasn’t so greedy”. Another is to depersonalise or belittle the victim – for example the recently prosecuted perpetrators of a series of frauds on Ebay, referred to their 3,000 victims as ‘the idiots’. However, for most people, such attitudes are difficult to maintain in the face of personal contact with an intended victim.

By contrast, telephone or internet fraud guarantees a psychological distance between fraudster and victim. The technology already provides a significant amount of depersonalisation: a ready-made neutralisation strategy. Thus, people who would find the emotional costs of face-to-face fraud too high are much more able and willing to engage in remote fraud.

Why are we so easy to fool?

When we fall victim to fraud, or the more legal but related forms of advertising and marketing manipulation, we often assist in our own deception. Effective fraudsters don’t try to fill out all the gaps in a story. Like professional magicians, they know that manipulating us to reach a conclusion for ourselves is more powerful than making a direct statement. We’ll fill in the gaps in story for ourselves given the right motivation; and they know that greed and fear are both powerful motivators that they can easily manipulate.

If we believe someone can enrich us, or we think they can prevent something we dread, we want to believe them and will often explain away any holes in their story for ourselves.

Once we have become victims of deception, another factor comes into play. Fraud is often under-reported. For most of us, self-esteem is important; and we, often quite unconsciously, look for ways to protect it. For this reason, we tend to pay more attention to information that builds our own self-esteem than information that threatens it. So, many of us are quite reluctant to accept that we are victims and are even more reluctant to tell others.

Intelligence and education are not a protection here. Indeed, there is some evidence that highly educated people are easier to fool, because they don’t expect to be fooled.

There are important parallels between the traits that make many of us easily deceived by fraud and those that make traders in financial markets easily deceived by market movements. In my own research on the behaviour of traders in investment banks, I found these well educated, intelligent and highly trained professionals to be often prone to illusions about the extent to which they were in control and able to make unbiased financial judgements.

Fear, greed and the need to maintain self-esteem may make many of us more easily trapped by a telephone scam, but they also account for some major mishaps in financial markets.

Protecting yourself from fraud

So if the world is full of fraud and human psychology disposes us to be dupes, how can we protect ourselves? There is no foolproof solution, but some simple rules may help: 

• If it seems too good to be true, it probably is.
• If a person, or organisation, starts to play on your fears it may be that person or organisation that you should fear.
• If you are fooled, it does not mean you are an idiot. You are in good company. Do take the time to report the scam.

Further reading

• The psychology of decision making – the same thinking processes that help you cope with everyday life prejudice your judgements in other areas
• The Psychology of Fraud by Grace Duffield and Peter Grabosky, pubilshed by the Australian Institute of Criminology
• Introduction: Traders, markets and social science by M P Fenton-O'Creevy, N Nicholson, E Soane and P William, published by Oxford University Press
• Trio jailed for £300,000 fraud on eBay 'idiots' by Audrey Gillan and Bobbie Johnson in The Guardian (29 October 05)
• 'The Psychology of Deception' by R Hyman in Annual Review of Psychology
• The American Confidence Man by R Hyman and Charles C Thomas

About the author

Mark Fenton-O'Creevy is Professor of Organisational Behaviour at the OU Business School. His research includes investigations into the performance of traders in financial markets, and the problems that occur when management practices are transferred from one country to another.

He is also a National Teaching Fellow, and Principal of the Centre for Practice-Based Professional Learning.

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