The competition watchdog has accused banks of charging customers more for unauthorised overdrafts than it cost to provide them.
The Office of Fair Trading said the fee levied for an unauthorised overdraft was not the price of providing the service.
It also claimed the charges meant customers were given credit on ‘uneconomic terms’ in which the fees were ‘disproportionate’ to the amount of money borrowed.
The group also rejected banks’ claims that the charges paid for a service, instead saying they did not relate to services provided to customers, but were rather services carried out for the benefit of the banks themselves.
It added that the terms relating to the charges were not written in ‘plain intelligible language’, were not ‘clear and transparent’ and in some cases they were even ‘liable to mislead customers’.
But it stopped short of saying the charges were unfair, saying it had not yet concluded its investigation and assessment of the fairness of them.
The information was included in the OFT’s reply to the banks’ defence, which it has submitted to the High Court ahead of its test case hearing over unauthorised overdraft charges.
The hearing, which is due to begin on January 14, has been jointly bought by the OFT and a number of the major banks to establish whether the charges are fair.
People can incur the charges for taking out an unauthorised overdraft or breaching their authorised limit. Charges can also be levied if customers make a payment but have insufficient funds in their account to cover it or if banks stop a payment because the account holder does not have enough money.
The document was published as the head of the OFT John Fingleton accused banks of generating billions of pounds through ‘surprises’ and ‘stealth’ and dismissed the idea that Britain has free banking.
He also said banks did not treat their customers fairly and relied on ‘hidden extras’ and ‘tricks’.
Speaking to BBC2’s Money Programme, to be broadcast on Friday night, he said: ‘We don’t have free banking at the moment.
‘At the moment, consumers pay for banking through surprises and through stealth, they don’t see what they pay and very often they pay when an unexpected event happens like an unauthorised, unexpected overdraft.’
He said the OFT hoped the test case would lead to a “fundamental change” in the behaviour of banks.
In which they treated customers fairly, with ‘no tricks, no hidden extras’ and in which pricing was ‘fair and simple to understand’.
Banks are thought to be raking in between £2 billion and £3.5 billion a year in fees charged when customers go into unauthorised overdraft.
The fees charged to customers can be as high as £39, but campaigners claim that the actual cost to banks as little as £2.50.
But defenders of the charges argue that if they were scrapped it would mean an end to free banking and all customers would have to pay a monthly fee.
The banks have sought to justify the charges by claiming they reflect a service the bank provides to the customer, namely considering whether to grant them an overdraft.
But the OFT has rejected this claim instead arguing that it was the bank rather than the customer that benefited.
Terms and conditions
It also rejected banks’ claims that an unauthorised overdraft was a temporary loan and that the charges were part of an ‘integrated pricing structure for a package of services’.
It said this was not the case as a customer who did not incur these charges was still be entitled to use the package of services available to a current account holder.
The OFT also accused banks of failing to use ‘plain intelligible language’ in their terms and conditions, adding that they did not provide consumers with a fair opportunity to understand how the charges would apply.
It said in some cases the terms were even ‘liable to mislead the customer’, with some of the banks giving the customer the impression that there was nothing wrong with going into an unauthorised overdraft.
It added that some banks said they levied the charges for ‘requests’, ‘services’ and ‘considering’ an overdraft, which it said made it seem like an unauthorised overdraft was similar to asking for an authorised one.
The OFT also announced that it will not be publishing the results of its market study into banks until after the test case has finished.
A spokesman for the British Bankers’ Association said: ‘Banks believe the fees customers pay for unarranged overdrafts are fair and clear.
‘But because customers, as well as the banks, would welcome legal clarity, some of our members have joined the OFT to approach the courts for a ruling on this issue.’
In response to the charge that banks do not offer free banking, he said: ‘Banks believe their fees are clear to customers. Our members also feel people readily understand that ‘free’ means something for which you do not pay a fee.’
He said most customers do not pay to use branches, ATMs, internet banking, standing orders, direct debits and debit card purchases, or to receive their salary or pension, or for bank statements.
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