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Banks – Customer Crisis 2007-05-01

Posted by clype in Intolerance, Money.

Profits may be high but bank customers are in revolt.

Customer service departments, ‘The Financial Ombudsman Service’ and even small claims courts are being swamped by angry consumers.

The chief reason is fees imposed by banks on customers who go overdrawn without permission.

Thousands of people claim that the charges they have had to pay when going into unauthorised overdraft are unlawful.

Under consumer law, fees have to reflect the true costs to the bank of the customer going overdrawn.

In other words, imposing an excessive penalty to boost profits is out of order.

Relationship breakdown

Banks and building societies are settling out of court or not contesting claims for the return of penalty fees —  a policy which many suspect is an attempt to avoid a test case.

However, as a parting shot, Alliance & Leicester and the Nationwide building society have been closing the accounts of some people who have taken them to court.

Their reason?
The relationship between them and the customer has broken down completely.

They have a point;

‘There is a groundswell of anger out there about the subject of bank charges and customer service,’ says Ms.Emma Bandey, personal finance campaigner at Which?.

‘People feel charges are too high, unfair and breach regulations. They also feel taken for granted.

‘In our surveys, “The Big Five High Street Banks” always come out bottom in terms of customer satisfaction.’

Against the backdrop of seething discontent, ‘The Office of Fair Trading‘ (OFT) is investigating bank charges and may well decide —  as they did with fees levied on people that miss their credit card repayments —  that the currently level of charges is too high.

It may not be the storming of the Bastille or the Winter Palace but revolt is in the air.

Mortgage exit fees

It is not just penalty charges which are prompting the ire of consumers and regulators.

In January, the BBC revealed that up to 10 banks and other financial institutions face fines from ‘The Financial Services Authority’ (‘The FSA’) over the sale of Payment Protection Insurance (‘PPI’).  ‘PPI’ is a form of insurance that covers people in case they cannot pay loans as a result of illness or unemployment.

In addition, ‘The FSA’ has told lenders that they may have to refund some customers mortgage exit fees.

A mortgage exit fee is the charge levied by the lender when a borrower closes their mortgage account.

Then there is the slow-burn issue of call centres moving offshore.

Time and again, consumers say that they would prefer to deal with a home-based call centre. Nevertheless, calls are still often answered in Delhi rather than Droitwich, or Cape Town not Carshalton.

Sacred cow

The latest widening of the chasm between banks and their customers has come over the issue of free banking.

Free current account banking is a bit of a sacred cow.

UK consumers generally do not pay for banking services while their accounts stay in credit.

But this is being eroded.

Lloyds TSB‘ and ‘The Nationwide‘ have both questioned the long-term viability of free banking.

Reading between the lines, their suggestion is that if penalty charges vanish then more consumers may ultimately have to pay for current account services.

In November 2006, ‘First Direct‘ broke cover and said it would start levying a fee on accounts which did not deposit 1500 GBP /month.

Increasing numbers of consumers are being moved —  with little notice —  into so-called ‘packaged’ accounts.

These are current accounts with bells and whistles attached such as travel insurance. The sting in the tail is that they charge a monthly fee.

Ms Bandey says banks make big money from money held in current accounts and that customers should not take moves to charge lying down.

‘If customers are hit with fees they should look to switch providers.’

Previous rows

Customers and banks have had spats in the past.

At the turn of the millennium, it seemed as if UK banks were poised to charge their customers to withdraw cash from ATMs.

A high-profile campaign against charges followed — and the banks backed down.

And in 2000, a government sponsored report by Mr. Don Cruickshank found that banks treated low-income customers and small businesses unfairly.

A period of relative calm then descended. The banks were happy as there was a credit boom to boost profits, and consumers felt richer because their houses shot up in value.

But this peace has not held for long.

Leaner, meaner?

Crucially, consumers, having maxed-out on their credit cards, are borrowing at a slower pace.

Worse still for the industry, banks are having to write-off increasingly large amounts in bad debts, not just in the UK but in their worldwide operations.

The results ‘HSBC‘ posted for 2006 contained a 5 500 million GBP provision for bad debts, up 35 per cent on the previous year, following problems at its USA mortgage business.

‘Expectations of bank profits are very high and there is a lot of bid speculation out there, particular relating to Barclays and to a lesser extent Lloyds,’ says Mr. Richard Hunter, Head of UK equities at ‘Hargreaves Lansdown’ stockbrokers.

‘Any hint that a bank could be underperforming in any area brings quite sharp share price falls and make it a potential target.’

So while customers see greed when telephone-number profit figures are announced, banks are still worried about the prospect of a takeover bid.

‘The banks are under pressure to produce big returns and tie up loose ends in the UK,’ Mr.Hunter says.

‘What we have seen with moves, such as that taken by First Direct, is a tidying up exercise.

‘In the current climate, banks have to be seen to be lean.’

Fair warning

But an increasing number of consumers seem to see their banks as just plain mean rather than lean.

For example, ‘The Financial Ombudsman Service‘ is getting 1 000 calls/day from people complaining about their bank.

However, according to Mr. Robert Skinner, the new Chief Executive of ‘The Banking Code Standards Board‘, banks could take some simple steps to improve customer relations now.

‘We would like to see banks give customers pre-notification that a default charge is being imposed,’ Mr.Skinner says.

‘This should give customers an opportunity to ensure they have sufficient funds in their accounts, which in turn should reduce the number of instances where a single default charge triggers further charges.’

He added that a requirement on banks to lend responsibly could help reduce bad debts.

But will this be enough to stop customers revolting?


The ‘Office of Fair Trading’ (‘The OFT’)  has launched a wide-ranging study into the charges banks impose on customers.

It could lead to recommendations that banks charge their customers annual fees —  an end to ‘free banking’. ‘The OFT’ said that at present, people had no idea how much they were really paying for banking services.

The study —  which has been welcomed by campaigners —  will sit alongside the watchdog’s existing investigation into unauthorised overdraft and bounced payment fees.

Customers have been seeing charges of up to 39 GBP for going over their agreed overdraft limit —  a fee that campaigners claim is disproportionate, unfair and potentially unlawful.

‘The OFT’ has said that it shares public concern over the level and incidence of penalty fees, but is not prepared to make a ‘quick-fix’ solution that could be detrimental to consumers as a whole.

It comes amid fears that forcing down fees could mark an end of ‘free’ banking and the emergence of charges on customers for simply opening or having a current account.

The watchdog said the wider study announced yesterday would examine the provision of so-called free banking to see whether customers were getting a fair deal from their banks.

Bank services for ordinary customers contain hidden cross subsidies and charges, which the OFT increasingly regards as unfair, for example poor rates of interest on money held in current accounts.

Another example is the large income banks derive from charging high fees to customers who go overdrawn without permission.

This helps them to subsidise the cost of running current accounts for customers who stay in credit. Chief Executive of ‘The OFT’ Mr.John Fingleton said:

‘This market study will enable us to consider wider questions about transparency and value in the provision of personal current accounts.

‘This will provide the necessary context for assessing the fairness of unauthorised overdraft and returned item charges before we apply the law in this area.’

Responding to the announcement, Ms.Emma Bandey —  a personal finance campaigner at ‘Which?’ —  said:

‘Banks could save a lot of time, money and effort if they just opened up their books and showed us how they work out their charges. Prove to us you are being fair.

‘We hope that this study is not surrounded by endless spin from the banks claiming a reduction in charges will spell the end of so-called ‘free’ banking.

‘Free banking is a myth. We are paying for our current accounts but just not in an upfront fee.’

Chief Executive of ‘The National Consumer Council’ Mr. Ed Mayo said:

‘Banks must deliver a fair deal for consumers and stop dragging their customer service reputation further into the mud by waiting for regulatory action.’

The Liberal Democrat Party’s Shadow Chancellor Mr.Vince Cable said:

‘I strongly support the OFT’s sophisticated move to call the banks’ bluff on the provision of so-called “free” banking. There is far too little transparency in the charges banks levy and customers are losing out as a result.

‘There is great concern that when banks are forced to stop illegal charges they will find other ways to abuse their position and take advantage of their customers.’

In a statement, ‘The British Bankers’ Association‘ said the industry continued to believe that its fees were legal, and added:

‘We are pleased “The OFT” recognises that the issue of bank account fees needs further consideration and is more complex than it had initially believed.’

‘”The OFT” now accepts that the application of the legal principles to overdraft fees is not the same as for credit card charges.

‘Our members remain of the view that “The Unfair Terms in Consumer Contracts Regulations” do not apply to current account fees [and] believe that the fees are legal.’

‘The OFT’ aims to publish the preliminary conclusions of its latest wider study by the end of the year.


We don’t have free banking. We pay for our current accounts in myriad ways.

In addition to penalty charges for such things as exceeding overdraft limits, we pay interest on overdrafts; receive poor levels of interest on balances in credit; pay for some services directly (e.g. bank drafts), and pay commission on foreign currency and get poor exchange rates. What’s more, as a result of our relationship with our banks, we take out all sorts of other products with them, such as loans and credit cards, effectively borrowing our own money at much higher interest rates than we receive in credit.

  • (It’s almost never a good idea to buy insurance, cards, loans, mortgages or anything else from your bank, because they charge a hefty price for your laziness. Take the time to compare these products on-line. It’s much cheaper.)

Now, ‘The Office of Fair Trading’ (‘The OFT’) is expanding its penal bank charges investigation to cover the transparency of all existing charges. The investigation will also look at the consequences of its actions if it manages to stop banks charging penal fees.

Mixed feelings about the wider investigation

I’m wary of the motivation for this investigation. It is likely that ‘The OFT’ is concerned about offending the millions of current-account holders who never pay penalty bank charges. If penalties are reduced or quashed, these people will have to start paying more for their own accounts, so that the banks can maintain their profits. That’s why I believe that this second investigation will be used by ‘The OFT’ to justify a much weaker decision on unlawful charges.

On the other hand, ‘The OFT’ can certainly justify the wider investigation, because part of its remit is to ensure that there is a healthy competition between businesses in the same industry. The consumer body will be concerned that the banks will use any ruling as an excuse to increase their profiteering.

Unless it comes up with something innovative, ‘The OFT’ has two options on bank charges: warn banks to cap them (as it did with credit cards) or take the banks to court over them.

‘The OFT’ will be hoping to come up with a win-win solution where bank charges are quashed or greatly reduced, the overall cost of banking doesn’t rise, and the costs of banking become more transparent. Achieving all this is impossible. If banks have to reduce their penalty fees and are forced to be transparent about their existing charges, they’ll simply come up with all sorts of new ways to charge people.

In fact, I believe that banks will do this anyway, as, one way or another, penalising people for bank charges will become a dead end.

The future of banking

Already we have seen more current accounts introduced that charge monthly fees. ‘First Direct’ charges many of its users 120 GBP/year for paying in less than 1 500 GBP/month. Plus, millions of ‘Lloyds TSB’ customers have been shifted on to fee-based accounts already, by failing to opt out of the switch.

Over the next few years, it’s probable that we will see a steady whittling away of free banking, as each bank pushes more and more people into accounts with fees. It’ll be a slow process, as no bank wants to be seen as the first to say ‘You’re all paying fees now’.

We’ll also see current accounts that charge people in many different ways, making it much harder to compare and choose the cheapest product for each individual. It’s easier to hide higher charges when a product is more complicated.

I suspect we will have to choose between current accounts that charge monthly fees and those which are free to have, but charge you for each service you use, such as withdrawing money, transferring funds and cashing cheques.

Then there will be accounts that combine the two. We can also expect accounts that pay virtually no interest in return for lower monthly fees or service charges. Plus, they will push harder their packaged accounts, which include things like travel insurance and discounts in selected retailers, but are of very dubious value.

Furthermore, the banks could use all this as an opportunity to earn more profits than they were when they were penalising the minority on a regular basis. They may rue the loss of a small portion of their previous profits, but they will not be scared for their future ones.
The law and ethics

Despite all this, I still want to see penalty charges withdrawn and penalised customers reimbursed. The penalties are unlawful, so people shouldn’t be penalised. I must repeat what I’ve said previously: it is wrong that a minority pay thousands to subsidise the accounts of other, wealthier people. The matter of effective competition keeping banking costs down should be looked at entirely separately.

A word from the wise

David Kuo, In-house Jester (a.k.a. Head of Personal Finance at The Fool), said:

‘We hope the OFT investigation brings an end to the practice of “robbing Peter to pay Paul”, or in some cases robbing Paul to pay Paul without him knowing.’

I’m not sure precisely what this Fool’s riddle means, but it sounds like a wise warning to me. We may hope this investigation makes costs more transparent, but, even the costs do become clearer, will that make us any wealthier?

  • We can get better deals if we compare current accounts. Comparing and switching is the only hope we have of increasing competition and, therefore, being charged less overall.
  • Your Credit Card May Cost You More


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