Britain's embattled banks have found a friend at last. Today's decision by Britain's new Supreme Court that the Office of Fair Trading cannot rule on the fairness of unauthorised overdraft charges is a priceless victory for the banks and Nationwide Building Society.
The Supreme Court overturned judgments of the High Court and Court of Appeal in favour of the OFT. Campaigners have long argued that the heavy charges for dipping into the red without your bank's agreement are punitive and unfair. The Supreme Court based its decision on its view that that unauthorised overdrafts were part of a package of banking services. The charges that banks levied when someone went overdrawn without authority were part of the charges for that current account, rather than a fee in exchange for an unauthorised overdraft. So they could not be regarded as a penalty for going into the red, and were excluded from the fairness test.
It's hard to avoid the conclusion that the Supreme Court reached a conclusion that would avoid further damage to Britain's beleaguered banking sector. In other words, public policy played a big part in its judgment, if not in the reasoning behind it. The world has changed dramatically since the test case was announced in July 2007. Two weeks later, the credit crunch began, and two months later Northern Rock customers were queueing to get their money out. The day before the Supreme Court's announcement, Lloyds announced Britain's biggest rights issue to avoid having to rely on the Government's Asset Protection Scheme. Campaigners like Phil Jones from consumer group Which? may be outraged by the judgment, but that's pure grandstanding. Delivering a body blow to the banks would have been popular, but ultimately consumers would have paid the price, as it would have meant the end of so-called free in-credit banking.
For almost 30 years, Britain has been one of the few countries where consumers do not pay a fee for in-credit banking. In most other countries, people pay to use a cash machine or to pay a cheque. Britain's unusual arrangement has been paid for by the people who go overdrawn without agreement. The campaigners have argued that the customers paying these unauthorised overdraft charges have been unfairly penalised, pointing to extortionate charges for relatively small overdrafts. The banks have won the day by saying that these charges are (largely) clear, and are simply part of the cost of having a current account. As Lord Walker said in his judgment, it is now up to parliament to decide whether it wants to extend the scope of the fairness test. But it's hard to see a government wanting to enter this bear pit. There are few votes in ending free banking for millions of people. And applying a general fairness test would be an impossible task. Is £115 a fair price for an iPod Nano? What about the £5.40 cost of crossing the Severn Bridge in a car?
Disclosure: I am a former bank PR manager.
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