It has been a long standing and common practice amongst banks and building societies in the UK to impose penalty charges when their customers ‘go into the red’. In fact, the imposition of charges has become so common-place that we, as consumers, appear to have accepted that if we play with fire, we will get our fingers burnt. Although the banks and building societies argue that they are entitled to impose a penalty when customers stray beyond the limit of their accounts, a closer examination of the amounts charged by the banks and the legal principles behind the charges has resulted in a flurry of activity before the courts.

The penalty charges imposed by banks and building societies in these circumstances have been challenged by consumer groups and by individuals on the basis that the charges do not reflect the cost to the banks or the work involved. For example, it has been suggested that when a customer’s cheque ‘bounces’, the true cost to a bank is likely to be a sum in the region of £4.50, whereas some banks and building societies may charge their customers the sum of £27.50. On this analysis, it would appear that the penalty charges in question exceed the cost to the bank or building society of the work involved and (as has been argued by consumer groups) the difference represents a tidy profit for the banks. This profit (which has been estimated to be in the region of £5bn per year) has now been challenged by consumer groups and account holders across the UK with some resorting to formal legal proceedings to recover the charges imposed.

The response from the banking fraternity to these challenges has been a stout and resolute denial. However, many customers who have demanded the repayment of their charges have been successful, even if they have had to turn to the courts for assistance. Indeed, it appears to have been possible for some customers to recover charges imposed in the past 6 years, plus interest calculated from the date the charges were debited. In the recent past, one individual was successful in recovering a sum in the region of £36,000 from his bank. Perhaps predictably, the Office of Fair Trading has indicated that an investigation into the issue is likely to follow later this year.

If you would like to discuss the issue of the recovery of bank or building society charges further, or if you require assistance with any other legal matter, Mercers’ specialist Litigation and Dispute Resolution Department will be pleased to hear from you. Please contact either Adam Marshall or Simon Hough on 01491 572 138 or email your enquiry to: amarshall@mercerslaw.co.uk.