Another small step forward against the Banks

January 25th, 2009

In another chapter in the ongoing bank charging saga, some customers of NatWest bank have a new opportunity to reclaim their bank overdraft charges after a High Court judge has ruled that the bank’s terms and conditions, used from 2001 to July 2003, may have included unfair penalties for going overdrawn.

The ruling by Mr Justice Andrew Smith is one of a several in the long running test case on bank charges. Most overdraft claims in county courts have been halted since July 2007 while the High Court resolves the issue.

The Nat West website claims that, “the court found that a single historic NatWest term prohibited customers from using a card to go overdrawn but this does not mean that that term is a penalty.”

The consumers’ organisation Which? Says that in theory some NatWest customers could now ask the courts to reopen their claims, but warned it would not be plain sailing.

The point is that the judge has said the Nat West charges may be penalties, which gives grounds for appeals, but he did not say that they are penalties. The onus remains on the customer to demonstrate that the charges really are penalties and did not reflect the cost to the bank of administrating the overdraft.

Also, as the issue of charges reflecting the cost to the bank is part of the OFT’s ongoing fairness assessment, Nat West may be able to convince the court to stay any cases brought against it until the OFT’s investigation is complete.”

The banking industry and the Office of Fair Trading (OFT) are waiting for the Appeal Court to hand down its judgement on a bank appeal against an earlier ruling by Mr Justice Smith. Last year he dealt a blow to the right of banks to levy high overdraft charges when he decided that the 1999 regulations, regarding unfair terms in consumer contracts, gave the OFT the right to scrutinise those charges.

This week’s judgement by Mr Justice Smith was one of three residual decisions, made on whether or not charges levied under old or “historic” terms and conditions could also be penalties under common law, and therefore not recoverable.

Last October he cleared most of the old contracts used by seven banks and the Nationwide building society, who are the parties to the test case with the OFT. However he needed more time to consider some of the terms and conditions used in the past by the Abbey, Lloyds TSB and RBS NatWest.

This week he gave the first two of those banks the rulings they had been seeking; that their former current account conditions did not fall foul of common law. But he found against the NatWest.

The significance of the judge’s decision is that if a clause in a contract imposes an obligation not to do something – such as not going overdrawn on a current account without permission – then any money charged for breaking that condition must not be more than is actually necessary to compensate the bank.

That is because under common law it is illegal for any penalty charges or fees, imposed by a business, to be excessive.

Campaigners have argued that typically it does not cost a bank more than about £2 to tell someone they have gone overdrawn and to repay their unauthorised borrowing. In contrast, bank charges have sometimes been more than £30 each time a customer has gone into the red or had a cheque bounced.

The OFT and RBS group are now considering their positions pending finalisation of the order. This means either side could appeal, which might delay any attempt to start a case in the county courts.

Taken together with the earlier decision of Mr Justice Smith that the OFT has the right to examine bank charges this further ruling including Nat West’s terms and conditions for a certain period demonstrate that the case is going the right way for consumers. However, the interminable bank delaying tactics will continue for some time yet.

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Inconveniant? Perhaps, but it`s safe

January 18th, 2009

HSBC is introducing new technology which will check every credit card transaction for fraud. The scheme will affect 10 million card accounts and millions of transactions. However, the banking industry has warned that more legitimate transactions will be queried or cancelled as a result.

But action needs to be taken. Card fraud is rising, up 14% in the first half of 2008, and fraud abroad now accounts for 40% of all card crime

Travellers are being advised to take several different payment methods, including cash, credit cards and travellers’ cheques when they go abroad.

After several years of falling numbers, card fraud started rising again in 2007. Latest figures show that card fraud could have exceeded £600m in 2008, and banks are using increasingly sophisticated systems to try to outwit fraudsters.

HSBC previously checked 25% of card transactions but is currently rolling out a system that means all card transactions will be screened in real time, with a decision made in a fraction of a second.

SAS UK, which is providing the software system for HSBC, say on their website, ´when you put your card in the machine it’s carrying out an automatic check against your pattern of normal use and making a decision about whether that is real or fraudulent.`

Banks are constantly battling with fraudsters to reduce the levels of crime. Card fraud is an arms race. The banks will come up with one way of dealing with it, the fraudsters will come up with a way round it.

The prime example is what we have seen with chip and pin. It was successful for 18 months, two years, but then the fraudsters have worked a way round it, so companies are now looking at more sophisticated means
However as the banks become more proactive in targeting fraudsters, more people could find their legitimate transactions are declined or queried.

Customers using their cards abroad are most likely to experience problems meaning that the first days of holidays are spent on the phone with banks rather than relaxing. If customers have relied on one means of payment the experience can be very stressfull indeed

Spending large amounts of money or using your card frequently can similarlay trigger the alarm at the bank.

As a recent victim of this type of crime (and also a very frequent traveller) I welcome this intiative. I arrived in Riga a few months ago and tried to draw some Lats out of a bank machine where my card was blocked. Then within minutes the fraud department at Barclays rang me up and established that it was me using my card an unblocked it

The simple fact is that the level of security we demand from the banks is so high that occassiaonlly we will inconveniance ourselves. However, limiting the accesss we have to our money briefly for security reasons is infinitely preferable to finding our money has vanished into the pockets of fraudsters.

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2009: The beginning of the story

January 9th, 2009

The economic turbulence of last year has left many people confused and scared about their personal finances. As the Bank of England took dramatic action to boost the economy, both savers and borrowers have had to work out what the new economic climate means for them.

Some borrowers have watched with delight as their mortgage repayments dipped ahead of Christmas. A customer on an average two-year tracker deal on a £150,000 mortgage has to pay an estimated £2,622 a year less following the last three Bank rate falls, according to price comparison website Uswitch.

Now, with the Bank rate expected to fall again on Thursday, banks will have to weigh up passing on rate cuts to borrowers while preserving competitive savings rates. At the start of October the UK bank rate was 5%. By the start of 2009, after three successive cuts, it had dropped to 2% – the lowest since 1951.

In the UK, consumers borrow a lot more than they save – with borrowing at nearly £1.5 trillion compared with savings of up to £1.1 trillion. These Bank of England figures are no surprise as most people with mortgages have higher borrowings than savings.

So when the Bank rate comes down, the interest payments on all this borrowing should drop too. However, that is looking uncertain at the moment.

Those with mortgage deals that track the Bank rate have seen the biggest benefits, as their repayments automatically fall when the Bank rate falls. Yet, the
UK’s biggest building society the Nationwide has said that for its customers this automatic reduction will stop if the Bank rate falls below 2%.

Less that 10% of mortgage holders have a variable rate mortgage (SVR), so for them it is up to their lender whether the Bank rate cut is passed on. Looking at the figures from the last few months, most major lenders, with the exception of LloydsTSB-owned
Cheltenham and Gloucester for example, have failed to pass on the cut in full for those with SVR mortgages.

Their rates vary, and some which have not cut in full still remain the cheapest. Repayments have not changed for those on fixed rate deals.

However, the Council of Mortgage Lenders says that about 1.5 million homeowners’ fixed rate deals came to an end in 2008, and they estimate that the number could be roughly the same in 2009.

A year ago this was a real problem, as these homeowners were reverting to an interest rate (often the SVR) that was much higher than they were paying before. Now it is likely that many will see their repayments falling when their fixed rate deal comes to an end.

Lenders are unlikely to pass on all the next round of cuts as they have to balance the needs of savers who are rightly feeling short-changed.

Those who might be kicking themselves at the moment are people whose endowments – planned to pay off their mortgage – have not proved to be as good investments as they were hoping owing to market turbulence. They are likely to be receiving letters telling them they need to up their financial input, because the endowment won’t cover the amount needed.

One issue for the government has been whether people with lower mortgage repayments will spend or save the rest of the money. Spending would stimulate the economy, but faced with job uncertainty during a recession they might decide to save. Not that they will get much back in interest on savings in the current climate.

Some 38% of savings accounts for deposits of £5,000 now pay an interest rate of 1% or less, according to financial information service Moneyfacts. But there are some good deals if people shop around and are prepared to tie up their money in an account for a year.

While we borrow more than we save in monetary terms in the UK, the number of savers exceeds the number of borrowers, perhaps by up to seven to one. Particularly hard hit by the latest saving rates cuts are the elderly who partly live off the interest of their life savings.

The National Pensioners Convention says 80% of pensioners rely on savings or investment income. If interest rates continue falling, they are more likely to eat into those savings rather than simply spend the interest.

Ultimately, this all goes to prove that there are lots of variables that the banks and building societies have to consider when reacting to the Bank of England Monetary Policy Committee’s decision on Thursday.

Expect the banks and building societies to take their time thinking about it, using the phrase that rates are “under review”. Meanwhile consumers like me and you have little choice than to wait and see what economic fortunes 2009 brings.

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