D-Day for Britain's Banks

A landmark court case will soon take place in the UK which could dramatically change the face of the country's banking system, and its future direction. The OFT (Office of Fair Trading) have filed an action against a number of banks, including Llyods TSB and HSBC, claiming that banking charges, for unauthorised overdrafts, bounced cheques and direct debits, are illegal.

The charges have been a hot topic in the UK for some time, with thousands of bank customers joining a media inspired bandwagon to reclaim charges. Many have successfully reclaimed thousands of pounds. So what are these charges, why are they so controversial and how have so many people claimed so much back?

UK banks have been raking in record profits, by the billion, over the last couple of years. It hasn't gone unnoticed that a fairly substantial portion of these profits come directly from charges. These are penalty charges of up to £35 placed against customers who go overdrawn, write cheques for which they have insufficient funds or have direct debits that are collected with insufficient funds in the account.

By law, a penalty charge cannot be a figure plucked from the air. Businesses are not allowed to 'fine' customers. The charge must represent the cost to the bank of administering the customers account regarding these transactions. The banks refuse to say how they calculate the cost of these charges, but experts have estimated that the most they could justifiably claim would be in the region of £4.50. But probably, in most cases, substantially less.

When this became publicised, customers started swamping Small Claims Courts to recover charges they had paid, and as the law permits claims to go back up to six years, this has often meant claims have been for pretty hefty sums. Banks have been seemingly loathe to fight a court case. They have claimed that the cost of the case is more than the amount claimed for, and have almost always settled out of court, or simply failed to turn up, handing the claimants victory. There have been allegations however, that banks simply do not want to have to justify the amount of their penalty charges, risking a precedent setting case.

Recently, the banks have gone to court and won some cases. But no precedent has been set, as the cases were effectively lost by the claimants for failing to file their claim, with the necessary evidence, properly.

Are bank charges unfair, full stop? Of course not - banks are not charitable organisations. They are businesses who exist to make a profit. But how they make a profit, and from who, is an issue that will be resolved by this test case. Is it fair to apply so many charges against the most economically vulnerable of the bank's customers? It has been claimed that these charges subsidise free banking for those who don't go overdrawn.

A recent survey has shown that only 8% of UK citizens want monthly charges for the administration of their bank account, and only 1% want a fee per transaction based system, which is how many banks operate around the world. It is fair to say that whatever the outcome of this court case, UK customers will not get free banking and banking free of charges.

But there is one issue that has not been raised. If the courts should find against the banks, declaring that the penalty charge system that they have been operating is in fact illegal, should further action be taken against those responsible for operating the system?

The definition of theft as per the The Theft Act 1968 Section 1 - a person is guilty of theft if: he dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it.

The banks have long been aware of the law regarding penalty charges, and indeed are still applying these charges today. The court case is not regarding a new law, and will simply be confirming its application in this instance. The banks had no intention of returning charges. Their policy seems to be very much inline with the definition of theft to me.

Having said that, I would be very surprised to see the CPS (Criminal Prosecution Service) apply criminal charges against anyone in the banking sector. Which is unfortunate. Should the banks lose this test case, they stand accused but not charged of taking customers money unlawfully, knowing it to be unlawful, having spent years refusing to justify its charges or allow them to be examined in a court.

The fall out of the case, if it is lost, will be interesting. Will banks be ordered to repay all charges, or will customers still be forced to initiate the action? Will an official investigation of some sort be launched, or will the whole sorry episode be quickly brushed under the carpet? We will have to wait and see...