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Current accounts: UK OFT ups its stance against overdraft charges

1st November 2007
By Maya Imberg

The UK's Office of Fair Trading has adopted a fiercer approach to bank overdraft fees.

The UK's Office of Fair Trading appears to have upped its stance on overdraft fees as it awaits the beginning of a High Court test case in early 2008. A long and tough battle is about to begin. Should the OFT succeed, banks will see a significant loss in revenue, and therefore seek other ways to recoup this loss, which may ultimately result in other changes that are unfavorable to consumers.

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Following the Office of Fair Trading's (OFT) investigation into credit card default charges in 2006, it has been looking at current account charges, including authorized and unauthorized overdraft penalty fees. Unsurprisingly, banks maintain their stance that they are lawful. Both are currently waiting until early 2008, when the High Court will decide on whether overdraft charges break existing rules on unfair consumer contracts.

Originally, the OFT's aim with the test case was to establish if it had authority to rule on the issue of overdrafts itself. However, the OFT recently published updated guidance that ups its stance. The OFT now states that if it is unable to secure voluntary compliance by the banks, it will push for a ruling that the charges are unfair. However, it will be a while until the matter is settled, and if it ends up in the House of Lords, the process may take longer than a year.

For now, banks are safe. As legal action is still undergoing, banks currently do not have to make progress with any new or unresolved complaints about their charges until the test case is over. In fact, during the first half of this year, banks were forced to return around GBP500 million before the announcement of the test case, but the Financial Services Authority (FSA) is yet to decide whether that waiver should be continued, changed or even revoked.

It is likely to be a tough battle. Should the OFT win the right to end penalty charges, this would inevitably force banks to look to recoup lost revenue in other ways. Ultimately, it will continue to be the consumer that pays for this, be it through borrowing rates, a compulsory account maintenance fee or overdraft rates. The regulator must be careful not to impose limits on banks that are too restrictive as such a move would end up negating the effects of the OFT's work in the first place.
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