Threats to free banking have delayed OFT ruling

The Office of Fair Trading’s delay on announcing limits on bank charges is an acknowledgement that a clampdown on fees could mean an end to free banking for all, leading financial research company Defaqto believes.

Defaqto’s Head of Banking David Black considers that any cap on charges is now likely to be set higher than previous estimates of £12 for certain items.

But he also believes banks could benefit from the introduction of a cap as it would limit the amounts of cash customers can claim as refunds. Currently the Financial Ombudsman Service is dealing with more than 1,000 inquiries a day about bank charges and individual banks are paying out compensation.

The OFT has announced a wide-ranging investigation into bank charges and will not report until the end of the year. Previously it had been expected to issue guidance by April 2007. Chief executive John Fingleton has said consideration has to be given to the effect on people who do not currently incur bank charges as well as those who do.

David Black said: “The banks are caught in something of a cross-fire at the moment. They are enjoying the proceeds of high overdraft fees and charges while also taking a hit by quietly refunding customers who complain. Any cap on charges from the OFT would hit their income going forward but would also set a limit on how much they have to refund.

“For the banks the issue of default or service charges on current accounts is of far greater concern than last year’s reduction of credit card fees to a standard £12. The simple reason is that the sums involved are very much greater.

“It will be imperative to listen to the public pronouncements of the major banks over the course of next six months as they may seek to cut their charges in order to influence the OFT decision.

“It is difficult to second guess the OFT but my expectation is that they will introduce a cap although for certain items it is likely to be higher than the £12 on credit card defaults.”

Some analysts argue that the better off or more financially prudent are currently being subsidised by the less well-off or imprudent. People who do not pay default charges have free banking if they remain in credit although millions do pay for their banking via added value accounts.