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Banks agree to charges test case

A number of UK lenders, including HSBC, Lloyds TSB, Royal Bank of Scotland and Nationwide, have agreed to go to court in a test case about overdraft charges.

On Friday, and with the banks’ backing, the Office of Fair Trading will file an action arguing that charges are unfair.

Banks have had a long-running battle with consumers over whether fees levied for unauthorised borrowing are legal.

Tens of thousands of cases have already been settled out of court, costing the banks millions of pounds.

Market watchdog the Financial Services Authority (FSA) will allow banks to suspend dealing with any claims for repayment of overdraft charges filed against them until the test case has been decided.

However, the banks will still need to make a note of any claims lodged, and will have to honour offers to settle that were made before the test case and FSA waiver were announced.

Unfairness rules

Angela Knight, chief executive of the British Bankers’ Association (BBA) said that legal clarity was needed to end uncertainty for banks and consumers alike.

She added that the banks had not softened their view that the charges were legal and fair, and said that the lenders could only “start looking at the issues underneath” once they had a ruling.

The Office for Fair Trading (OFT) said that the lenders had approached the UK’s financial watchdogs in order to sort out the problem and agreed to the test cases in England and Wales, Scotland and Northern Ireland.

Royal Bank of Scotland
Clydesdale Bank
Abbey National
Lloyds TSB

The OFT said that on Friday it would commence proceedings in England’s High Court for “a declaration on the application of the law in respect of unauthorised overdraft charges”.

At the heart of the court case will be whether or not the overdraft charges are a fair reflection of the costs incurred by banks.

Under current rules, the banks cannot make punitive charges when customers exceed their overdraft limit without prior permission or write cheques when they have insufficient funds in their accounts.

Customers have been arguing that the fees levied far exceed the costs incurred by the banks.

“The OFT considers that a quick determination of this point of principle will assist in securing a clear and orderly resolution of the fairness of these charges,” it said.

Out of court?

To date, the banks have been reluctant to contest such cases, usually settling out-of-court.

If a bank were to do so and lose its argument that the charges were fair, it could lead to many more bank customers getting refunds, analysts said.

The BBA’s Ms Knight said that the banks had been unwilling to take an individual to court as the case would be different from person to person and would not offer a definitive answer on the legal issues being questioned.

She declined to say how much the banks stood to lose should the test case go against them, but said that it could affect the way they do business in the UK.

There has been speculation that lenders could end their free consumer bank accounts should the ruling go against them.

“We are defenders of free banking,” Ms Knight said, adding that while it was too early to say what the outcome of the court case would be “we cannot say it will have no impact”.

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