ALEX BRUMMER COMMENT: Making amends at the bank

By ALEX BRUMMER, CITY EDITOR
Updated:

Britain's banks have had little to cheer about of late. The clampdown on governance proposed in today's Walker report suggests that the revolution seen on the boards of the semi-nationalised banks could spread much wider.

Similarly, the disclosure of emergency loans to Royal Bank of Scotland and Halifax Bank of Scotland provides a sharp remainder of how badly these two institutions were run before they were saved from the knacker's yard.

So the Supreme Court ruling that the Office of Fair Trading has no right to scrutinise bank charges for fairness will come as a relief in the boardrooms. It is ironic that at the point of the banking industry's most political vulnerability, because of their past behaviour, they have been given relief from the wrath of consumers.

Had the case been lost they might have been required to shell out up to £6bn in compensation for past wrongs.

Bank statement

Some banks charge up to £35 if customers exceed their agreed overdraft limit

The Supreme Court ruling was largely about the nature of the contract between the bank and the customer rather than fairness. No one in the country, including the highest in the land, can be happy about the arbitrary nature of overdraft charging.

A late wages payment, a cheque which goes astray or other mishaps all lead to arbitrary penalties.

It will be up to the banks about how they deal with the one million or so customers directly affected by the ruling. If they had any sense they would put the case of customers ahead of their own employers and perhaps use bonus pots to compensate.

Certainly, it is a good chance for them to show that they really have the customer, who is also the taxpayer, at heart. Beyond the immediate reaction a more orderly process is needed. The Competition-Commission is there to look precisely at charging structures and overdrafts would appear to be a case for a full inquiry and an enforceable decision.

It would be a tragedy if the banks saw the Supreme Court judgment as an excuse to carry on as before.

The one effective argument that the banks made is that by punishing miscreants with overdraft charges they are able to preserve free current account banking, including no charges for ATM withdrawals. Why should the responsible customers, who remain in balance, reward those who don't manage their affairs properly?

That is an alluring argument if we could trust the banks not to raid our accounts willy nilly. The Abbey, now part of Santander, has fired the first shots in a price war by promising not to charge customers for unauthorised overdrafts if they are also mortgage customers. It is a decent start to a new era.

It will be fascinating to see which lenders have the courage to follow.

Debt interest

The prejudice in advanced economies in favour of debt financing is an established fact across the globe. But as we saw during the boom it has brought with it unfortunate consequences in the shape of takeovers financed by borrowed money. Underlying companies, bought in this way, struggle for funds to pay down the debt, let alone consider fresh investment.

Among the jewels in Britain's infrastructure crown to be sold during the boom was P&O Ports, sold to Dubai for a high price.

Much of the opposition to this deal was on national security grounds. The US did not much like its Eastern seaboard ports under Gulf control, but the better case was the borrowing involved. Now Dubai World, owner of the ports, has asked its creditors for a sixmonth standstill on its obligations.

Such events make one wonder why companies, like Kraft, are so intent on raising great debt finance for takeovers. It may have managed to pay for its putative takeover of Cadbury but the impact of that borrowing on future plans could be constricting.

It will be a brave government which dares start to take away the tax break on the interest charges of debt. Yet we know this is something which has attracted the attention of the George Osborne and could help them in their effort to bring down the headline rate of corporation tax. It is worth considering as the world struggles to deleverage.

Slow burn

The profits warning from QinetiQ explains why the board decided to part company with chief executive Graham Love last month and replace him with former De La Rue troubleshooter Leo Quinn.

Now that the new CEO is in place it may be time for him to suggest to chairman Sir John Chisholm (who collected an estimated £20m on floatation) that he reconsider his position. He is currently scheduled to go in July 2010.

That is far too slow a timetable.

Most watched Money videos