ANALYSIS: Pirates of Finance

Mark McLaughlin
Edinburgh Evening News
September 9, 2009

As the Royal Bank of Scotland breaks from the pack to slash charges for customers who go overdrawn, Mark McLaughlin looks at the possible long-term effects, especially as the banking sector faces the final stage of a court challenge by the Office of Fair Trading over the validity of the fees

IT IS the great consumer rebellion, to use the words of the customers' rights champion Which?.A mass uprising of more than a million banking customers to reclaim billions of pounds' worth of unfair bank charges.

The Royal Bank of Scotland announced this week that it was slashing its charges for customers who go overdrawn.

Although it is not the first British bank to react to mounting pressure ahead of a UK Supreme Court ruling on punitive overdraft charges, its jump has been the biggest to date.

The good news is that experts believe other banks will be already weighing up the need to trim their charges in order to stay competitive.

As well as an attempt to preempt the upcoming court ruling, RBS's move has widely been seen as a direct response to Which? research that placed it at the top of a league of shame for overdraft charges earlier this summer. In other words, it's that customer revolution - and the threat of millions of us taking our money elsewhere - that has prompted action.

"We see this move as just another twist in the consumer rebellion that started around 2006, when well over a million people submitted challenges to reclaim their bank charges," says Which? personal finance campaigner Phil Jones.

"Bank charges are worth GBP 25 billion to the banks every year, so there's a lot of money at stake and the banks are taking this to the highest court in the land because they don't want to pay back the money."

In the two years since the Office of Fair Trading (OFT) launched its test case to prove that charging exorbitant amounts of cash for going over pre-agreed overdraft limits, often by little more than a few pennies, it has cut a swathe through the courts. The OFT won the first two rounds - at the High Court and the Court of Appeal, which both decided in its favour - but the banks then took it to the final court of appeal in the House of Lords.

This responsibility has now been passed on to the new UK Supreme Court and there is an expectation that it may too rule in the OFT's favour.

But regardless of the outcome of that crucial case, the consumer champions are insistent that the only way of making sure you get the most from your money is to be ready to shop around.

"Statistically, you're more likely to change your marriage partner than change your bank," says Phil Jones.

"People sign up to a bank in their youth and never change, often through fears that their standing orders or direct debits will go astray, but this is how people end up getting a raw deal.

"Changing is easier than many people think and most banks will offer to bring your direct debits over without any hassle, and if any do go astray the bank really should be reimbursing you."

While consumer groups have lauded RBS's decision as a step in the right direction, they point out it still only gives the bank a mid-table ranking in the Which? league of shame.

Other banks that appear to be offering a good deal on unauthorised overdrafts, they warn, may be clawing it back from other charges.

Halifax Bank of Scotland, for example, gets a glowing report in the unauthorised overdraft table, with charges of just GBP 15, but were found to be charging huge authorised overdraft charges of GBP 108 a year. HBOS defends its charges, pointing out it has an easy to follow structure.

"The account is based on a simple daily charging structure for using an overdraft -GBP 1 a day for using an arranged overdraft up to GBP 2,500 and GBP 2 a day for arranged overdraft balances above this," said an HBOS spokesman.

The advice for anyone who is unhappy with their bank is simply to shop around, but don't just look at unauthorised overdraft charges, warns price comparison website moneysupermarket.com. These charges are not the only way the banks make their money at your expense.

Some banks pile payment charges - where customers have paid for an item when there wasn't enough money in the account - on top of the unauthorised overdraft charge and they can often be more expensive.

Nationwide, for example, charges GBP 20 for the unauthorised overdraft, and GBP 30 for the unpaid item.

Ian Williams, director of communications at moneysupermarket.com, says: "Some banks have already made a move to reduce their bank charges, so RBS isn't the first. It's a competitive market so other banks will follow suit if appropriate.

"The banks have always argued that their charges reflect the costs associated with managing unauthorised borrowing. If this is the case, I would question how they have been able to reduce their costs so significantly."

UNAUTHORISED overdraft charges (GBP )

You pay heavily for going overdrawn without arranging it with the bank first

HSBC [a] 0

Halifax/Bank of Scotland [b] 15

Barclays [c] 22

Northern Rock 28

Cahoot 30

Nationwide 41.5

Lloyds TSB 42

Natwest/RBS 70

Abbey 65

First Direct 75

Smile/Co-operative Bank [d] 80

Norwich & Peterborough BS 88

Alliance & Leicester 90

Table shows what banks in Britain charge for an unauthorised overdraft of GBP 30 for three days, including charges for a GBP 10 cheque on day one, a GBP 10 direct debit on day two and a GBP 10 standing order on day three that the bank pays. Figures don't include interest. [a] Assumes customer has had an overdraft review in the last six months. HSBC doesn't charge for paid items of GBP 10 or less, but charges would be applied for paid items of more than GBP 10. [b] If account funded with GBP 1000 a month, customer gets GBP 5 credit monthly regardless of unauthorised borrowing. [c] GBP 22 reserve usage fee (one fee per five consecutive working days). [d] Assumes this is not the first informal overdraft during the year, so therefore the service charge of GBP 20 has been included.

AUTHORISED overdraft charges (GBP )

The charges that you pay per month for an arranged overdraft vary widely

First Direct 17

Cahoot 21

Norwich & Peterborough BS 21(Gold Account)

Abbey 28 (Preferred Overdraft current account)

NatWest/RBS 33

Smile 34

Nationwide 40

Lloyds TSB 40

Barclays 41

Co-operative Bank 54

Alliance & Leicester 60(Overdraft cost after 1 yr)

HSBC 67

Halifax/Bank of Scotland 108

Northern Rock 110

Table shows annual cost of a GBP 500 authorised overdraft for 2 weeks a month with British banks, assuming you pay in GBP 1000 a month.