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The consumer watchdog’s decision to investigate whether bank overdraft charges are legal has sparked outrage among current account providers. But as the wrangling continues there is no better time to stand up to your bank and demand the return of cash it has taken from your account when you slipped into the red.

The banks reap an estimated £4.7 billion a year from charges on unauthorised borrowing. But the Office of Fair Trading (OFT) has announced that it will investigate whether charges of up to £39 a time are legal. The OFT is expected to introduce a limit on overdraft charges, similar to the £12 cap on credit card default charges implemented this year.

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If you have been penalised for repeatedly going over your limit and believe that the charges are unfair, you should write to your bank to request a refund. Although it is unlikely that you will receive the full amount, the bank may offer part of the total. If you think that the bank’s reply is unsatisfactory, you can take the case to the Financial Ombudsman Service (FOS), which can force the bank to offer a refund if it agrees that you have been treated unfairly.

Emma Bandey, of Which?, the consumer organisation, says: “People should not be put off challenging their banks while the OFT investigation is carried out. But be prepared for some bully-boy tactics that banks have used to intimidate customers, such as closing accounts. Customers should open a new account elsewhere before making a challenge.”

For advice on how to complain, go to the FOS website at www.financial-ombudsman.org.uk or call 0845 0801800.

In future, try to minimise any charges by keeping regular checks on your bank balance and pending direct debits or standing orders. If there is no way to avoid going over the limit, contact the bank first because it may agree to waive the charge. Similarly, if you accidentally go over your limit and contact the bank as soon as possible, it may agree to refund the charge.

Trying to stay in the black will be crucial in the coming months because some banks have increased their overdraft interest rates.

Credit Suisse estimates that capping unauthorised overdraft charges at £10 would reduce banks’ profits by £1.2 billion. With this source of revenue in danger, the banks are turning to those customers who have authorised overdrafts.

On September 1 Lloyds TSB, NatWest and smile all put up rates on their main current accounts. Lloyds TSB’s Classic Plus account now charges 18 per cent, up from

15 per cent, on overdraft borrowing. NatWest customers with Current Plus, Advantage Blue or Advantage Gold accounts are paying between 1.14 and 1.16 percentage points more. Customers with smile, the internet arm of the Co-operative Bank, suffered a dual blow: it added two points to its overdraft rate and increased the monthly service charge from £7.50 to £10.

HSBC has gone one step farther, announcing a clampdown on those who depend too heavily on their overdrafts. From December it will impose stricter rules on overdraft allowances and conduct annual checks on customers who request overdrafts regularly.

Banking could become even more expensive if the OFT caps charges. Defaqto, the research group, responded to the OFT announcement by suggesting that such a move could lead to the end of free banking in the UK.

Ed Wells, of Troika, the financial services consultancy, says: “The jury is still out, but charging for services is something that banks would like to introduce. They say it would allow them to offer more transparent and fairer pricing.”

Case study

STEFAN ZUBAC, 24, won back £750 of £1,495 in overdraft charges incurred on his Barclays current account after requesting a refund. The bank agreed to halve the total sum as “a gesture of goodwill” and to avoid “the cost and inconvenience inherent in a further dispute”.

The original total was a result of Stefan, left, intermittently exceeding his authorised overdraft limit by £10, for which he was charged a £30 penalty on each occasion. He repeatedly asked the bank for leeway of £20 before going over his limit to tide him over before his pay went in the account, but his requests were denied.

Stefan says: “It was a vicious circle. The bank would stick me in a situation where I could never get out of my overdraft because it never gave me any grace period to pay off the unauthorised amount before it started charging me again.”

Know the Banking Code
# The Banking Code, set up by the Banking Code Standards Board (BCSB) in 1999, aims to ensure fair dealing and standards of good practice in the UK.

# Principles of the code include a commitment to clear information on interest rates and charges and how accounts work. Banks should also “deal quickly and sympathetically when things go wrong”. At present, the BCSB believes that banks “could do more” to fulfil their obligations on transparency.

# The code applies to current accounts, personal loans, savings and credit cards but excludes mortgages, investments, general insurance, pensions and life assurance.

# Signing up is voluntary, but most banks and building societies in the UK have agreed to abide by the code. The Post Office has not signed up but is in talks with the BCSB. A few small building societies and private banks have yet to sign up.

# The BCSB is lobbying to change the code so that banks are required to give 14 days’ notice before charging for an unauthorised overdraft. Seymour Fortescue, of the BCSB,

says: “This would ensure that customers have time to query the charges if necessary. It would also help to avoid charges on top of existing charges.”

The Times
September 17th, 2006