BBC study finds banks charging customers £30 in penalties for £4.50 "service"
A BBC study today gives support to claims that banks are charging customers far more than it costs them to handle cheques that bounce and process unauthorised overdrafts.
Campaigners say banks are prohibited by law from charging more in penalties than it costs them to process defaults, and are already demanding that banks pay back millions of pounds of customers' money.
Now a study - commissioned by The Money Programme for a special Bank Robbery! at 10pm, Tuesday 12 December, BBC Two - concludes that it costs banks no more than a maximum of £4.50 when a customer's cheque bounces, and no more than £2.50 to bounce direct debits, or deal with unauthorised overdrafts.
These costs are far below the average £30 penalties banks charge their customers for these defaults.
Campaigners have been claiming that bank penalty charges are illegal and thousands of people in Britain have already successfully reclaimed penalty charges from their banks on the basis that they are unlawful.
The Money Programme study into bank costs was undertaken by a three-person commission comprising two top business academics, together with a former senior executive with NatWest.
The BBC asked the commission to take account of all the expenses they thought banks might face in dealing with customers' defaults and come up with the highest costs they believed banks could reasonably justify.
The maximum £4.50/£2.50 costs identified by the Money Programme study will reinforce campaigners' claims that bank penalties are illegal.
Reacting to the BBC's findings, Stephen Hone - a leading campaigner against penalty charges and founder of the website www.penaltycharges.co.uk - told the programme: "It clearly shows the banks have been scamming people for years on these charges and they are totally unlawful, so it shows people that they can go back and claim their money back."
The Money Programme findings also shed new light on why banks have so far paid customers' claims and not defended the legality of their penalty charges in court.
Barrister Kieron Beal of Matrix Chambers told the programme: "It's odd that they've not chosen to fight a case to date. It does suggest that perhaps they are finding it difficult to justify the charges that they impose upon their customers."
The programme will report that pressure on the banks to justify the legality of their penalty charges is increasing.
Walter Merricks, the Chief Financial Ombudsman, told the programme that he will no longer entertain banks' offers of partial settlements of customers' claims.
Mr Merricks said banks should now pay customers' claims in full or explain why their charges are legal.
"If they are not prepared to do that and they want to argue the point," Mr Merricks told the programme, "then I have to start down the road of investigating myself."
Angela Knight, Chief Executive-designate of the banks' trade body, the British Bankers' Association, gave the programme an indication of a new legal argument banks might deploy to argue that their penalties are legal.
Ms Knight told the programme: "They're not penalties, they're in fact service fees."
Challenged by the programme that people might be astounded to hear that banks regarded bouncing a cheque as a service they enjoyed, Ms Knight said: "I didn't say that they enjoyed it. We may not like the service when we go and do something wrong but nevertheless it is part of the service."
Ms Knight went on to say: "The legal opinion that the banks have had is that what they're doing is entirely legal."
The banks' legal arguments are now being scrutinised at the Office of Fair Trading.
The OFT is enquiring into the legality of current account penalties and believes that the same legal principles under which, in April this year, it judged credit card penalties to be unlawful, apply equally to current account penalties.
John Fingleton, Chief Executive of the OFT, told the programme he was prepared to listen to any arguments the banks made but that "if it comes down to a disagreement between us and the banks on that legal principle, that's something we're prepared to litigate on."
There is guidance on procedures to make claims on bank charges on bbc.co.uk/moneyprogramme.
Notes to Editors
The Money Programme Commission
The commission began work in October and met in London a month later to reach a final conclusion. The commission was established by the programme after all the major banks had declined its invitation to say roughly what it cost them to deal with customers' defaults. The Money Programme study into bank costs was undertaken by a three-person commission comprising two top business academics, Professor Philip Molyneux of the University of Wales, Bangor, and Professor John Struthers of the University of Paisley, together with an experienced banking practitioner, Ian Jarritt, formerly a senior executive with NatWest.
Campaigners say Unfair Terms in Consumer Contracts Regulations (1999) prohibits banks from charging more in penalties than it costs them to administer their customers' defaults. They argue that because penalties are higher than banks' costs, they are illegal and can be reclaimed by customers. A copy of the Regulations can be obtained at: http://www.opsi.gov.uk/SI/si2001/20011186.htm
The Office of Fair Trading
In April 2006, the OFT published a report which stated that they judged credit card penalties averaging £25 per default to be unlawful. The OFT set a new £12 maximum for credit card penalties. On 7 September 2006 the OFT announced a new enquiry into bank current accounts - further information from: http://www.oft.gov.uk.
The British Bankers' Association
The British Bankers' Association is the principal trade association for banks operating in the UK. Further information from: http://www.bba.org.uk.