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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.

Last November the Money Programme revealed how large numbers of customers were successfully taking court action to retrieve charges made by their banks for exceeding overdraft limits and for other bank account ‘misdemeanours’.

Such charges are a major money spinner for the UK banks. Whilst it is unclear exactly how much UK banks earn from them, best estimates suggest a figure of between £2 billion and £3.5 billion a year. The consumer campaign against these charges has made the banks start to talk about the possibility of charging all customers for current accounts to compensate for the revenue stream that would be lost if these unauthorised overdraft charges are deemed unfair.

Arguably the court cases are being won by customers because the banks are not adequately defending the actions - relying only on a written defence and not turning up in court to argue their case. This tactic has resulted in judicial criticism from several County Court judges. Additionally some banks have been settling cases out of court, perhaps because the time and cost of even a limited defence in court is not viewed as being cost effective even if judgment is made in their favour.

Over the past twelve months the story has developed further, with attention focussing on action to clarify the legality of these bank charges.

In March the Office of Fair Trading (OFT) announced a formal investigation into the fairness of unauthorised overdraft charges. This followed on from the OFT’s initial review where it concluded that it shared public concern about the level and incidence of such charges. The OFT recognised, though, that applying the general principles it had set out in 2006 in respect of credit card charges - where the OFT recommended a maximum default charge of £12 - was not straightforward.

Subsequently, in April, the OFT announced details of a more wide ranging investigation into bank charges - including the examination of so-called ‘free banking’ and the implications of moving towards the charging of customers for provision of current account. This investigation sits alongside that into the fairness of unauthorised overdraft charges.

Then in May the Lloyds TSB became the first bank to successfully defend actions by customers trying to reclaim charges, with victories in the Birmingham and Lancaster County Courts. Other banks are now using these judgments to defend cases brought against them.

At the heart of the issue lies the question of whether the 1999 ‘Unfair Terms in Consumer Contract Regulations’ (UTCCRs) apply to unauthorised overdraft charges. The banks believe the rules do not apply; the OFT believes that they do. So given the lack of clarity the OFT launched proceedings in the High Court in July for a legal declaration on the applicability of the law. The other parties to the test case are the Abbey National, Barclays Bank, Clydesdale Bank, HBOS, HSBC, Lloyds TSB, the Royal Bank of Scotland and the Nationwide Building Society. Together these current account providers account for circa 90% of personal current accounts in the UK. The parties to the action are all interested in a timely and orderly resolution of this legal issue. Clearly the banks need to know where they stand on a matter which has attracted so much adverse publicity for them.

In September the OFT announced that it would consider dropping the test case if the banks unilaterally cut charges significantly. Under these circumstances it would no longer be in the interests of consumers to press on with the case. Currently, however, the OFT is still set to continue with its test case which is scheduled to be heard early in 2008.

The outcome of this case will shape the future not only for such overdraft charges but, in all likelihood, for the charging for the provision of current accounts for all customers.

Find out more

• Join the discussion - are bank charges unfair?
• Are banks ripping us off? - when a cheque bounces, we get charged. Is this fair?
• Your and your money - don't let your money be the boss of you
• Take it further - the Open University Business School offer a range of courses covering personal finance
• Personal Finance edited by George Callaghan, Ian Fribbance and Martin Higginson, published by John Wiley & Sons

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.

Subscribe to Martin Upton's posts

 

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.

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.

Subscribe to Martin Upton's posts

 

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 last ten years have seen the level of personal debt in the UK nearly triple in size. The total of personal debt passed £1 trillion in 2004 and currently amounts to £1.2 trillion.

Faced with burgeoning debts, millions of borrowers have taken out payment protection insurance (PPI) to provide the upkeep of payments on loans, mortgages and other commitments in the event of accident, sickness or unemployment.

The market has become huge with around seven million policies being taken out each year generating some £5.5 billion in premiums for the lenders and the insurance companies underwriting the products. The majority of the products (about 60%) are sold in conjunction with unsecured personal loans with the remainder being related to credit card, store card and mortgage borrowing.

On the face of it insuring against such risks would seem to be a prudent course of action – it is little over a decade ago that a period of high unemployment and high interest rates forced thousands of homeowners to default on mortgage payments and lose their homes during the recession of 1990–1993.

However, increasingly evidence is being gathered that questions both the way PPI policies are being sold and the value of the products themselves. In many cases the terms of the policies may mean that a financial lifeline may not be forthcoming in the way expected by policyholders in times of need.

In response to these growing concerns the Financial Services Authority – the body that regulates the UK financial services industry – undertook a review of the selling practices for payment protection insurance and its results were published in November 2005 in the report 'The sale of payment protection insurance'.

Then, in December, the Office of Fair Trading (OFT) published its initial response to the ‘super-complaint’ submitted to it by the consumer advice body, Citizens Advice, on the cost and effectiveness of PPI. This followed Citizens Advice’s own survey, 'Protection Racket', that suggested that aspects of the PPI market are damaging to the interests of consumers.

Further question marks about PPI have now come in the Competition Commission’s report on store cards published in March 2006.

So what are the issues?

There are three main areas of concern: price, insufficient cover and mis-selling:

1. The price of PPI products appears excessive

This finding was supported by the report 'UK banks: PPI – Time for change', carried out by the investment bank Credit Suisse First Boston (CSFB), and the OFT which found the claims ratio for PPI products (claims as a percentage of premium income) to be around 20%. That is, for every pound paid in as a premium, the PPI schemes were paying out just twenty pence in claims.

This figure is markedly lower than for other types of general insurance: for instance 74% for motor insurance and 55% for household insurance. For an industry facing tight margins in many conventional areas of business the high margins offered to financial companies by PPI have clearly been attractive.

The risk of purchasing an overpriced product is exacerbated by the fact that PPI is a secondary transaction involving little in the way of shopping around by consumers. The Competition Commission’s inquiry into store cards supported this view and found "that little or no competitive pressure is brought to bear on the elements, or the pricing, of insurance sold with store cards".

2. The protection offered is only partial, with many policies having unreasonable exclusions of cover for common causes of credit default

Around one in six claims under PPI policies are rejected by the insurers. The evidence from the recent surveys sheds much light on the reasons for this high rate of rejection. The FSA found that nearly half of the firms it visited that were selling PPI "were not providing the customer with balanced information on the exclusions as well as the benefits".

Indeed, firms offering products are not required to reveal exclusions verbally in face-to-face sales. In one case the FSA found that a policy with an age limit of 65 had been sold to a 68-year-old man. Not only did this mean that he would have been ineligible to claim on the policy but also, because he was retired, the majority of the benefits from the policy were not relevant to him!

More generally the exclusions in PPI policies are wider than many consumers might have anticipated – including claims by those with chronic illnesses or mental health problems. Citizens Advice also discovered some cases where customers have been unable to claim because of unreasonable requirements to provide medical evidence.

3. There is evidence that products are mis-sold and that high pressure and unfair sales tactics are employed

The FSA survey does not criticise the sales techniques in all the firms it surveyed. However, in two-thirds of the firms visited aspects of selling practices were discovered that did not stick to all the rules, therefore posing a risk to consumer protection.

In certain cases, the FSA found incentive structures in place that risked increasing the scale of non-compliant sales. In one loans company staff were paid a £20 bonus for each PPI sale and the bonus system was structured in a way that could double staff salaries. Individuals not meeting their targets got no bonuses and were earmarked as having a training need.

Another example of poor sales practice emerged from the sales script used by one loans company for PPI products. This stated that "we do not offer advice but will provide you with information on accident, sickness, unemployment and life cover" – but then later, the script tells the salesperson "if the client is unsure then you can tell them that we strongly recommend that you consider taking out PPI".

A further angle on the issue of mis-selling has come in the Competition Commission’s report on store cards. It found that PPI is being sold to customers in a package with price and purchase protection. (Price and purchase protection insure the policyholder against, respectively, the risk of the goods being subsequently offered for sale at a lower price and the risk of damage to, or loss or theft of, the goods purchased.) As a consequence customers are at risk of buying insurance they do not want or need.

In addition to these three main issues the survey evidence also found that, in certain cases, the administration of PPI claims is slow and unfair, thus exposing consumers affected to serious debt reinforcement action.

Following its initial response in December 2006 the OFT is now planning to undertake a detailed study of the PPI market. We will learn more about the OFT’s intentions later in 2006. Following the publication of its survey, the FSA sought feedback from the companies providing PPI and is expected to undertake a further review of sales practices in the near future.

The prospect, given the current apparent shortcomings, is that the sales of PPI will become more tightly regulated. Already the FSA’s Insurance Conduct of Business rules, introduced last year, have resulted in many retailers stopping the in-store sale of PPI with telephone sales being used instead to market the product.

For consumers the phrase caveat emptor (buyer beware) clearly applies. You may be paying over the odds for PPI and the insurance product may not offer you financial support when you need it.

Further reading

• Association of British Insurers
• The sale of payment protection insurance – results of thematic work (pdf document) by the FSA
• Financial Services Authority
• Response to the super-complaint on payment protection insurance made by Citizens Advice (pdf document) by the OFT
• Office of Fair Trading
• Protection racket – Citizens Advice
• Citizens Advice
• Storecard Credit Investigation – Competition Commission
• Competition Commission
• 'They get you to buy cover, then leave you naked' by Esther Shaw, from The Independent on Sunday (12 Feb 06)
• Why do we get into debt? – is debt always a bad thing? asks The Big Question
• You and Your Money: Personal Finance in Context (DB123) – the course includes coverage of personal debt and the insurance markets

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.

Subscribe to Martin Upton's posts