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UK bank penalty charges are at the current war zone in the perennial struggle between customers and the financial services industry.

Last month the Office of Fair Trading capped the penalty charge on overdue credit card payments at £12. The OFT is now carrying out a preliminary review of current account charges and will decide early next year whether to order a full-scale investigation.

Penalty charges for most transgressions of current account terms have been rising steeply, according to a study* by Defaqto, a research consultancy. Banks and building societies have increased charges by up to 20 per cent over the past three years.

Average penalties for bounced cheques and unpaid standing orders and direct debits are more than £30, compared with around £27 in August 2003. One in four customers incurs unauthorised overdraft fees amounting to an estimated annual cost of £3bn, Defaqto says.

These charges are frequently criticised as discriminating against the poor because people with stretched finances are more likely to stray outside the limits set by their bank.

But the availability of special accounts for those with limited funds, which do not permit overdrafts or issue cheque books, suggests that it is often people with a standard account, and presumably a reasonable income, who are incurring charges.

“It is not necessarily low-income people who abuse their current accounts,” says Stuart Bernau, executive director at Nationwide Building Society. “It is more a personal characteristic regardless of income. It can be someone who earns a lot of money. Some people with little money work perfectly within their budgets.”

If you are unsure about your ability to keep a close eye on your account, you should look at banks that do not levy high charges. Abbey, First Direct and Nationwide do not levy stopped cheque fees while Bank of Scotland and Halifax do not charge for unpaid standing orders or for unpaid direct debits on their Youth accounts.

But other banks charge hefty fees with Cahoot demanding £12 – the highest in the market – for stopping a cheque while Bank of Scotland and Halifax charge a whopping £39 for unpaid cheques, standing orders and direct debits on their ordinary, high interest and moneyback current accounts.

Knowing where the banks see their best opportunities for future profits will help customers understand why a particular product is being so assiduously promoted. They can then take a critical look at the deal on offer.

Students are a crucial market for the banks. Because people are reluctant to change their account provider – 61 per cent never have – signing up potential high-earners is the best way for the banks to win new business. For the banks, the special student offers are a small price to pay for a lucrative lifetime customer.

Free gifts such as CDs, iPods and young person railcards are still on offer but better value can be found in interest-free overdrafts of up to £2,500 – compared with unauthorised overdraft rates of up to 33.5 per cent.

Premium accounts, which offer interest rate discounts, motor breakdown cover and preferential restaurant deals, are also very lucrative for the banks – earning them nearly £1.4bn a year. Banks are expected to promote these heavily, although customers should consider whether they want all the benefits or if they can obtain them more cheaply elsewhere.

The OFT clampdown on credit card charges and, potentially, on current account charges has generally been welcomed. But if charges are removed for “delinquent behaviour” the banks will have to recoup their costs somewhere. Bank customers in most of Europe and in the US do not enjoy free current accounts.

“There are significant administration  costs in-volved in providing a current account service,” says David Black, the Defaqto head of banking.

“Regulatory changes on fees may result in cross- subsidisation no longer being available. This may be fairer but it is unlikely to be welcomed by those customers who currently pay little for the benefits they receive.”

“Ninety-five per cent of our customers keep their accounts in credit or within the agreed overdraft,” says Bernau. “If all those people who get free banking find themselves having to pay, that would not be a consumer victory.” 

The Times

September 22nd, 2006