UK banking charges: regulator's tough stance risks nullifying consumer benefits

22nd May 2006
By Maya Imberg

The UK's Office of Fair Trading may pull back from setting a limit on overdraft charges.

In a letter to the banking industry, the OFT has made it clear that the GBP12 limit on credit card penalty fees will not be applied automatically to overdrafts, as the regulator has not yet carried out enough research into this market. However the regulator is still likely to push for a general reduction in overdraft fees, raising the possibility that the banks may look elsewhere for profits.

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The Office of Fair Trading (OFT) first told credit card companies in July 2005 that they needed to cut the high default fees levied on customers who make late payments or miss payment deadlines. Following its research into the market, the OFT concluded last month that credit card penalty charges for late or missed payments should be limited to GBP12 or less, typically half the usual charge.

In a move that caused considerable alarm, the OFT also said that the same principles on credit card default charges could be applied to overdraft and mortgages. Such a move would have a significant effect on revenues, as lenders make substantial profits from these fees. Indeed, some bank analysts say slashing overdraft charges to GBP12 or less could cut GBP1 billion from the leading banks' profits.

Most recently, the OFT has written a letter to the banking industry reiterating its position that the general principle on credit card fees do apply to overdrafts and mortgages. However, it stated that the GBP12 threshold is not intended to read across markets. It intends to continue researching the market before making a final decision.

While it is possible that banks may decide not to comply with the OFT's stance on credit card fees, they are more likely to make some concessions on penalty fees in order to assuage the concerns of the OFT and the public.

While the OFT is attempting to introduce greater fairness and transparency in the market, the regulator must be careful not to impose limits on banks that are too restrictive. Such limits could mean banks looking elsewhere for profits, which could see them introducing higher headline rates or other charges. Such a move would end up negating the effects of the OFT's work on default fees.
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