Current account unauthorised overdraft charges
last updated July 2008
An unauthorised overdraft charge is typically charged when a bank or building society current account holder exceeds the agreed overdraft limit on the account.
Following its report earlier in 2006 on credit card default charges, the Office of Fair Trading (OFT) announced in September 2006 that it was considering the application of the same principles (which are derived from unfair contract terms legislation) to bank current account charges. Subsequently, in March 2007, the OFT announced an in-depth study of retail bank pricing to sit alongside a formal investigation into the fairness of bank current account charges.
Following the OFT’s announcements, the number of complaints received by banks and building societies concerning the level, fairness or lawfulness of these charges increased significantly, as did the number of complaints and claims that were referred to the Financial Ombudsman Service and to the courts.
At the same time, concerns about the approach by some banks and building societies to the handling of customer complaints about unauthorised overdraft charges were referred to the Financial Services Authority (FSA) which carried out a review.
The FSA, OFT and the Ombudsman Service have discussed the issues raised by these complaints and agreed that they had wider implications; the issues are new and involve a large number of banks and building societies and affect a large number of consumers.
In July 2007, the OFT announced that it was starting proceedings in the High Court of England and Wales for a declaration on the application of the law in respect of unauthorised overdraft charges. This followed an agreement between the OFT and a number of banks and a building society to begin legal proceedings in order to determine whether the unfair contract terms regulations apply to unauthorised overdraft charges and/or whether such charges are potentially unlawful at common law (the "test case") with a view to securing a clear and orderly resolution on the fairness or otherwise of these charges.
At the same time, the FSA announced it would grant a “waiver” to banks and building societies so that they do not need to handle complaints relating to unauthorised overdraft charges within the time limits set out in the FSA rules. This is subject to various conditions to ensure that customers are not materially disadvantaged during the test case.
The Ombudsman Service announced that in view of these developments, it will not progress consideration of the merits of complaints about unauthorised overdraft charges in personal bank accounts until the resolution of the test case and has published guidance for customers with complaints.
In November 2007 the FSA reviewed whether the waiver was working as intended and published its conclusions. In April 2008, the High Court issued a ruling on the "test case" that confirmed the OFT's view that personal current account unauthorised overdraft charges can be assessed for fairness. It answered some of the questions but not all of them and there may need to be further hearings. The OFT announced that it would review the judgment and continue with its investigation into the fairness of the relevant terms.
In July 2008, the FSA issued a new waiver to replace the existing one, which was due to expire. The new waiver has been offered to all firms that signed up to the previous waiver representing around 98% of the market. As before, signatories will not to be required to handle complaints about unauthorised overdraft charges within the time limits set out in the FSA's Dispute Resolution manual.
The new waiver has been designed to address the issues found during FSA’s follow-up work to assess the impact of the previous waiver on consumers. The key points of the new waiver include:
- A duration of six months and a review early in 2009;
- Continuation of the FSA's consumer protection measures including record keeping requirements and a suspension of the limitation period for making a complaint;
- Additional guidance on the identification of those complainants in financial difficulty; and
- Enhanced monitoring of firms focussing on consumers' experience whilst the waiver is in place.
Also in July 2008, the OFT published the findings in its market study of personal current accounts in the UK. Overall, the report found that the personal current account market is not working well for consumers. The OFT is now consulting about the issues raised with banks and other interested stakeholders.