Banks and credit card companies have been
ordered to stop ripping off consumers with 'unlawful' penalty
charges. In a ruling on credit cards, the Office of Fair
Trading said today charges should not exceed a 'fair' level
of £12.
But it added further that the principle could also be
extended to default charges in other consumer contracts,
such as bank overdrafts, mortgages and store cards. The
ruling will have massive implications for the financial
services industry.
The consumer watchdog claimed consumers are being ripped
off to the tune of £300m a year by unlawful penalties
on credit card charges. The charge of £12 is less
than half the fee most card issuers currently impose on
customers.
Default charges are levied by card providers if customers
are late with minimum repayments, exceed their credit
limit or make repayments by cheque or direct debits which
are not honoured.
Credit card companies have been raising the fees they
charge in recent years as they struggle with the loss
of revenue caused by customers chasing 0% deals.
Analysts have warned that the ruling could cost the banks
more than £1.5bn in lost revenues and falling bank
shares knocked the FTSE 100 following the news.
The OFT insisted that a default charge can only be used
to recover certain administration costs, such as the staff
and stationary costs of dealing with the default. However,
it added that in exceptional businesses circumstances,
such as when a direct debit agreement has been broken,
the bank could be justified in charging more than the
recommended £12.
The OFT began looking into the charges in 2003 and warned
card companies in July last year that it thought the default
charges were too high. It has given them until the end
of May to respond to today's statement.
OFT chief executive John Fingleton said: 'We expect credit
card issuers to adjust their default fee levels quickly.
We have not ruled out future legal action if the market
does not respond positively.'
Despite the ruling, only a court can ultimately decide
whether a charge is unfair or not. As the OFT admitted
its view is not supported by the main card companies,
it is likely that a court test case will be required for
the firms to actually lower the charges.
The OFT did not have figures on the average default charge,
but recent research carried out by moneysupermarket.com
found the average charge was £22.68, with some as
high as £25.
The ruling is the latest clampdown by British regulators
and politicians on the consumer lending industry. At the
request of a parliamentary committee, the OFT has stiffened
rules on credit card advertising and is investing store
credit cards for lack of competition.
The Government has also tightened rules for consumer
credit, making lenders give more information on interest
rates and better rewards for early repayment.
Barclaycard, the UK's largest credit card company, said
it would be seeking further clarification from the OFT.
The company has been battling behind the scenes to protect
its right to charge the fees.
Paul Smee, chief executive of UK payments service Apacs,
said: 'Every individual card company will now have to
consider whether it agrees with the OFT's interpretation
and whether the way in which its own charges are calculated
is in line with the OFT's approach.
Card companies have argued that the default charges that
they have historically charged have been fair, transparent
and lawful.'
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