Banks pay back £200m in charges

By SIMON LAMBERT, THIS IS MONEY PUBLISHER
Updated: 09:18 EST, 19 July 2007

The rush of customers reclaiming unfair bank charges has cost Britain's banks an estimated £200m already this year, according to a new study.

The report by Credit Suisse said that the banks had been hit hard by the backlash against heavy charges for going overdrawn without permission and repaying penalty charges would cost around 1% of the major groups' profits.

Banks have so far avoided disclosing how much they have repaid in charges, but some are expected to reveal the amounts in their first-half results due this month.

The big banks have been forced to take on extra staff to deal with the claims, with an estimated 500 claims per day arriving at some banks earlier this year, but there has still been no test case or ruling which would clarify the situation.

Both Barclays and HBOS, the group that combines Halifax and Bank of Scotland, have acknowledged that charges were eating into their profits.

HBOS said it will separate its costs from penalty charges from its earnings, a move described as 'surprising 'by Credit Suisse's analyst Jonathan Pierce. He predicted in the report that reclaimed charges would cost the banking giant £50m - a sizeable chunk of its retail banking profits

He said: 'HBOS said the number wasn't material but that's subjective and anything above £50m would, in our view, be material in the context of the retail bank and pose a serious threat to management credibility.'

Customers have been successfully reclaiming thousands of pounds in penalty charges, which have been deemed unfair under consumer contract law which says they must reflect the costs banks incur.

Banks have routinely charged up to £35 each time customers have gone overdrawn without permission due to failed payments, cheques or direct debits, despite the true cost being put at between £2 and £5.

Banks have been arguing that the charges are not penalties, but charges for services. However, when challenged to reveal their costs in court, banks have backed down and paid out claims.

An investigation by the Office of Fair Trading into charges was extended earlier this year, due to concerns that any moves to cut the charges or order refunds would lead banks to stop offering free banking, which high penalty charges have been subsidising. A decision is due by the end of the year.