Thursday, 27 November 2008

The Bank That's Fair

To keep up my professional development points, I'm currently groaning under more than just the weight of the judgments in the UK overdraft charges litigation against the 7 institutions who've cornered the current account market.

Here's some context for the case:
  • UK overdraft users - and particularly those who incur fees - essentially pay for everybody's personal current account service. Mr Justice Smith found in his April judgment that interest on credit balances as well as overdraft interest and fees are relied upon by banks to provide "free-if-in-credit banking" (para 53). The fees "are not set by reference to the costs of activities which give rise to them, but... to support the personal current accounts service as a whole" (para 54).
  • Further, consumers have no real choice in the market for current accounts. So they're stuck with the current pricing situation. In July the OFT reported that:

"The complexity and lack of transparency of personal current accounts makes it extremely difficult for individual customers to compare their bank account with other offers. There is thus little incentive for consumers to switch - especially as people generally believe that it is complex and risky to switch accounts. Also, when the switching process does go wrong consumers can find themselves bearing a significant proportion of the resulting costs. The result is that only six per cent of customers we surveyed had switched in the last 12 months - one of the lowest switching rates in Europe."

While I'm interested in the judicial reasoning to date, you'll be aware the case is frustratingly inconclusive on whether or not the charges can even be assessed for fairness, let alone whether they are actually fair or not. In the current economic circumstances, I agree with Which? that such uncertainty is "piling on the misery" for those affected - and as Mr Justice Smith found in his April judgment (at paras 56, 57), that's roughly 20% of current account customers with an overdraft facility. The Financial Ombudsman Service is awaiting the outcome of proceedings before processing any more complaints and this has encouraged various opportunists to bury their snouts into the trough of despair.

In the midst of all this, you may recall that Barclays recently launched its "Personal Reserve" - an 'over-overdraft', as it were. It's obviously an attempt by the bank to dig its way out of the litigious mess. But as this slew of Google search results demonstrates: when you're in a hole, stop digging.

Personal Reserve is supposed to be a very "simple and transparent" "service" in itself. Trouble is it's targeted at overdraft customers on an opt-out ony basis. And surely one can infer that it is intended to address a key issue with the underlying overdraft - what happens when you exceed the limit. In that sense it could be seen as a feature of the overdraft, rather than a service in itself. Further, a trawl through the multiple web pages describing the feature alone suggests that it is some distance from being either simple or transparent. It's less than clear what happens if you opt out - I can't even find a link to an explanation of the ordinary unarranged overdraft situation, if that still applies. And the fact that there are many different circumstances which can trigger additional charges makes it just as tough to forecast the potential cost of a 'bad month' as with any overdraft - something that's never been what you'd call "simple" or "transparent". Finally, it just doesn't smell right that one could be charged £22 every 5 days that you use as little as £1 of your "Personal Reserve" (see FAQ #7).

I'll spare you further detail, save to say that the feature does rather whet one's appetite for a whole new merry-go-round of analysis as to how well it really complies with the myriad technical requirements of the law related to fees, interest rates, advertisements and consumer contracts, including the Unfair Terms in Consumer Contracts Regulations 1999 (the subject of the current litigation) and the brand new Consumer Protection from Unfair Trading Regs. Indeed, it will be interesting to see how this feature, and overdraft charges generally stack up as "treating customers fairly" etc., etc., under the FSA's reforms to the retail banking regime, whenever those might take effect.

But as the current inconclusive litigation demonstrates, the legal niceties don't transmit to the coal face very quickly, if at all.

So surely there's a golden opportunity for one of the members of the current account collective to break ranks and genuinely distinguish itself from the others. It could start by submitting to an independent assessment of the fairness of its charges. Then it might capitalise on the pleasant surprise by diverting the money it spends on TV ads claiming to have the personal touch towards actually engaging with customers to produce something that they buy into as fair.

Anyone for first-mover advantage?

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