OFT launches test case on unauthorised overdraft charges

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The UK Office of Fair Trading (OFT) has begun proceedings in the High Court claiming that unauthorised overdraft charges are unfair to consumers. The OFT believes the unfairness rules of the Unfair Terms in Consumer Contract Regulations applies in these cases, and is seeking to establish this legal principle in court. Aside from its belief that such charges are unfair, the OFT decided to act now because it found it was not able to secure voluntary compliance.

The motion is hotly contested by UK retail banks – namely Abbey National, Barclays Bank, Clydesdale Bank, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland and Nationwide Building Society. However, regardless of the tens of thousands of claims banks have received over unfair bank charges, they have usually settled rather than forcing the matter to court.

The test case will force clarity on the issue once and for all. While the case is ongoing, the UK Financial Services Authority (FSA) has allowed banks to suspend dealing with any claims for repayment of overdraft charges filed against them until a decision has been made. But the banks will be required to retain a log of any complaints made in the interim, and will be forced to honour any settlements made before the FSA’s waiver was announced.

The test case complements the OFT’s ongoing market study into personal current accounts, which addresses wider questions about competition and price transparency in the provision of personal current accounts that was announced in March 2007. The OFT will continue to work closely with the Financial Ombudsman Service and the Financial Services Authority, in addition to consulting with banks and consumer groups. It will publish its findings by the end of the year.

Should the OFT be successful, it could mean the end of free banking, as banks attempt to recoup costs from elsewhere.