Bank charges: Daylight robbery says uSwitch

Around 18.96 million people have been hit by bank charges, totalling £4 billion, and over half (52%) have still not managed to claim the money back, according to research from uSwitch.com.

As a result, there is a pot worth £2.12 billion waiting to be reclaimed. For just £10, people can get copies of previous bank statements and write to their banks to reclaim charges incurred over the last six years (plus 8% interest), but only 14% of consumers are aware of exactly what they are entitled to claim.

The research also revealed that while 65% of the 18.96 million people that have incurred some form of bank charges have disputed these fees at some point in time, only 48% (9.1 m) have successfully received a refund. Almost one in ten (1.5 million) have written to a regulatory body, such as the Financial Ombudsman, threatened their bank with legal action or taken them to court. Of the few that have taken legal action, 14% claim to have had their current account closed down by their bank as a result.

The banks' arguments for the end of ‘free banking’ focuses on the fact that customers who go overdrawn are currently paying for those who don't go overdrawn and that banks face costs in running current accounts for all. It is widely believed that current account charges will be reduced in the very near future and that this will result in customers either having to pay a monthly fee for a current account or facing 'pay as you go' charges based on how much an account is used and what it is used for.

The research found that 83% would leave their bank if they decided to introduce a monthly or annual fee for a standard current account. On average, consumers have been with their current bank for 16 years, while a third have stayed put for more than 20 years. The introduction of banking fees will clearly be a catalyst for one of the biggest ever shake-ups in the current account switching market.

Some banks have already introduced charges to combat costs incurred on their current accounts. Lloyds TSB recently increased the monthly fee on their Premier Banking account by 70%, from £15 to £25, unless customers keep a monthly balance in excess of £5,000, while Halifax has recently launched an account charging £10 a month. And since 1st February customers who only hold a current account with First Direct have been asked to pay at least £1,500 each month into the account (internal transfers excluded) or maintain an average monthly balance on the account of over £1,500. Customers who do not do so may otherwise be charged a banking fee of £10 a month for the privilege of having a basic bank account.

Consumers polled in the uSwitch.com survey also said that a “fair” sum for a bank charge would be on average £4.07 (close to the £4.50 estimated to be the true cost to banks by the BBC’s Money Programme in December). If fees were cut to this level, the average total incurred by consumers who have fallen victim to bank charges would fall from £215 to just £34.07; the revenue banks have generated from fees would fall by 84% from £4 billion to £646 million. Alternatively, if they were capped at £12, as they are now on credit card default fees, the banks’ revenue would drop by 53% to £2.2 billion.

Nick White, Director of Financial Services at independent price comparison and switching website uSwitch.com, comments: “While the majority of banks are bending over backwards to refund bank charges to those consumers that take the initiative to fight back, this is not because the banks have gone soft in the last couple of months. They would simply rather settle now than have to appear in court and face a damaging test case which would set a dangerous legal precedent. However, the fact remains that only a court can determine whether a charge is unfair or not, and a test case may be the only way to resolve this issue once and for all.”

Key findings

Exceeding an authorised overdraft limit is the most popular reason for being stung, affecting 71% of consumers. On average, consumers say that they have been charged between 3 and 4 times for this reason by their current bank, while one in ten say they have been hit more than 10 times

Direct debit or standing order payments with insufficient funds in an account have affected more than half of consumers (58%), who have been charged between 2 and 3 times on average for this, while 7% have been charged more than 10 times

Debit card payment without sufficient funds to cover the purchase, cheque-bouncing, and cash withdrawals without sufficient funds are also common reasons - affecting 27%, 24% and 16% of people respectively

Two-thirds (66%) think there should be a ‘buffer’ zone for people who go less than £10 in the red

Nearly a third (30%) think that first time offences should always be refunded immediately and a further 21% think that they should be refunded on request

Four out of 10 think that each case should be looked at on its own merits using an appeal process

Just over a quarter believe that current accounts should be frozen as soon as they go overdrawn to stop people spending money and incurring more charges

White concludes: “Refunding bank charges is thought to be costing the banks at least £50m. The Financial Ombudsman Service has recently claimed that is was receiving 5,000 complaints a day about ‘unlawful’ bank charges with a spokesman saying that the number of complaints was unprecedented and has “even eclipsed mortgage endowment complaints”.

When this is combined with the likely outcome of the OFT’s impending investigation, which is set to recommend a cap on fees, the banks’ profit margins are likely to be hit hard hard.

“The UK is one of the only place in the world that doesn’t charge for current accounts. Customers have enjoyed free banking on current accounts for the past 23 years but the current backlash against charges for items such as overdrafts and bounced cheques, as well as ongoing investigations into lucrative financial products such as Payment Protection Insurance (PPI) on loans and credit cards, will serve as catalyst for the fast introduction of monthly fees. Barclays, which recently posted record profits of £7.14bn, said that the bank was “determined” to protect free banking, but rival Nationwide believes charging for current accounts is a “fairer proposition”. The next 12 months, will be decisive in determining the future of ‘free banking’ as the debate rages on and the banks are forced to take action.

“We are in little doubt that the introduction of banking fees will be one of the biggest triggers for current account switching that we’ve ever seen.”