Have you ever been at the wrong end of a penalty charge, imposed by your bank, for a letter sent about a breach of your overdraft limit or a bounced cheque? Thousands of customers have had this experience and now the mood is turning from anger to revolt about the scale of these charges.

Estimates of the UK banks’ earnings from penalty charges vary widely but The Times puts the figure at close to £5 billion per year.

Some groups are claiming that the charges are unlawful, being set at levels that breach the 1999 Unfair Terms in Consumer Contracts Regulations (UTCCRs). Mike Dailly of the Govan Law Centre, supported by Citizens Advice in Scotland, claims that banks can only recover the amount of money they have actually lost as a result of a customer doing something wrong – they cannot impose penalties or fines.

Activists have pointed to the report on credit card charges by the Office of Fair Trading (OFT) in April 2006. This recommended a maximum for default charges of £12. In examining what is a fair level, the OFT reviewed not only the UTCCRs but also the legal precedents covering damages for breaches of contract. The OFT concluded that "default fees have been set at a significantly higher level than is fair for the purposes of the UTCCRs".

"UK banks could earn £5 billion a year from penalty charges"

The Consumer Action Group, a consumer body promoting action against bank charges which has over 13,000 members, claims that the OFT’s findings on credit cards set a precedent for penalties for bank account breaches. Indeed, the OFT itself said that it expects the principles it had used to be applied to other bank charges. The Group recommends that customers take action in the small claims court to reclaim excess charges.

Martin Lewis of moneysavingexpert.com – where the bank charges discussion board has notched up 41,000 consumer postings – claims that we are seeing a consumer revolution, with thousands of customers demanding refunds.

A number of sites advising on the reclaiming of charges, going back up to the maximum of six years allowed under the 1980 Limitation Act, now exist on the internet. Many customers have already been successful in reclaiming bank charges - such as Laura Saunders of St Ives in Cornwall who successfully challenged the Yorkshire Bank over charges amounting to £922 in a County Court ‘test case’ in 2005.

Such successes to date may, though, simply be attributable to the banks’ failure to defend the actions.

So are the customers who incur these charges at the wrong end of a banking ‘rip-off’? Not so say the banks. They disagree with the OFT’s legal reasoning on credit card charges and they, along with the British Bankers’ Association, reject the notion that the same principles apply to other bank charges. Notification of contract terms is supplied to customers and the banks claim that charging for breaches of the contract terms is lawful.

And as regards the scale of the charges – the banks say it represents the appropriate economic costing for the action being taken. So says Ian Mullen, Chief Executive of the British Bankers association (BBA), who claims that the process of dealing with customers who have breached overdraft limits involves manual intervention – and is not just computer processed – with the result that the charges levied reflect the costs actually incurred by the banks.

Additionally banks would argue that, elsewhere, they do not charge customers for the economic costs associated with their bank accounts. For example, close to 95% of ATM transactions are still free - in contrast to the United States where around 40% are charged. In many parts of Europe customers pay an annual fee of as much as €50 for the provision of a bank account .

So what does the future hold for these bank penalty charges?

Currently the OFT is investigating whether it should now impose a cap on unauthorised overdraft charges. Some banks, perhaps in reaction, are now considering re-introducing charges to customers for providing bank accounts as this would help to claw back the lost earnings if overdraft charges were to be capped.

In November 2006 First Direct, the online banking arm of HSBC, announced that it is planning to introduce a £10 monthly charge for all customers who neither place a minimum of £1,500 of earnings into their account each month nor hold a minimum average balance in the account of £1,500.

So the outcry about overdraft charges could end up triggering the end of free current account banking in this country.

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