The ‘big freeze’ leaves bank customers out in the cold

The ‘big freeze’ on bank charges introduced last month will result in almost one million claims, worth a staggering £713 million, being put on hold, according to research from uSwitch.com. By keeping this money from consumers, these frozen claims will net the banks an extra £20.5 million in interest over the next six months while the OFT prepares its case.

Mike Naylor, Personal Financial Expert at independent price comparison and switching website uSwitch.com, comments: “Legal clarity on bank charges is long overdue. The OFT has already sent out a clear message that it does not consider default charges to be a legitimate source of revenue. In light of the banking industry’s refusal to change its practices the issue is now set to be determined once and for all by the courts.

“For consumers, the impact of the OFT’s test case against bank charges could extend far beyond the current account market. The outcome of this ‘battle’ will establish a clear benchmark for the banking industry on the legality of penalty charges, and we hope that the same principles will then be applied to penalty fees for other financial products, such as mortgages.”

Mike Naylor continues: “The decision about whether bank charges are lawful is now out of the hands of both the banks and the OFT, although of course the banks remain at liberty to continue levying charges on their customers.

“There are at least one million claims that have been frozen pending the result of this test case, and no doubt there will be a deluge of complaints to follow if the Court finds that the charges are unlawful. The very least the OFT should be doing right now is working to ensure that proper systems and guidelines are put in place to ensure that once the Court’s judgement is issued the banks abide by a strict timeline and adhere to a clear set of guidelines. The banks should not be allowed to allocate themselves an open ended deadline to enforce the Court’s decision or to deal with one million outstanding claims. One thing is for certain – past experience has taught us that leaving the banks to do the right thing of their own accord is a recipe for disaster.”

Retail profits vs. bank charge refunds so far this year

The top five UK banks recently announced their six-month profits for the first half of 2007, totalling almost £4 billion. Interestingly, it is neither the banks with the largest share of the current account market nor those with the highest retail profits who have made the biggest pay outs when it comes to refunding default charges to their customers. According to the banks half year profit announcements, Barclays and HSBC, who have the smallest share of the current account market in the UK, who have led the way by refunding £207 million between them to their customers in the first six months of 2007. This is more than the combined total paid out by HBOS, RBS, NatWest and Lloyds TSB over the same period of time.

How much have the banks repaid?

Over the past six years 3.8 million customers have successfully claimed back bank charges, receiving an estimated £2.6 billion – an average of £686 per claimant. Those customers who have been hit with charges estimate that they have paid out an average of £742 over the last six years to their banks. However, Abbey customers have been hit the hardest paying, on average, a total of £1,376, compared to HSBC customers who have paid an average of £719 each.

The lion’s share of the revenue generated by the UK’s biggest banks has been scooped by Lloyds TSB who have generated a staggering £1.932 billion in income from bank charges alone. HSBC has made a considerably lower but not too modest income of £1.2 billion in charges over the past six years.

Rejected claims

However, not all customers who have challenged their banks over default charges have been successful. Seven per cent of people (340,976 customers) have had their claims rejected. In fact, the banks have only paid out £2.6 billion to customers - a drop in the ocean compared to the £12.4 billion they have charged over the last six years. The total in rejected claims amounts to more than £253 million.

Mike Naylor concludes: “The day of reckoning for penalty charges is finally on the horizon. The OFT has said that that the hearing at the High Court will take place at the beginning of next year, and for banking customers, this day cannot come soon enough. In the meantime, those consumers who have recently received a settlement offer from their bank should think very carefully before they accept it, as once the offer is accepted, it is unlikely that they will be able to make any further claims.”