Overdraft fee

Unauthorized overdraft fees (sometimes called "paid referral fees") are fees charged by banks on various types of bank accounts, usually current or checking accounts. In the United States alone, overdraft fees bring in billions of dollars every year. Unauthorized overdraft fees are levied whenever an account holder either exceeds their overdraft limit, if they have one, or their balance dips below nil if they do not. Whether these fees are legal or not is a contentious issue in the United Kingdom, where a large campaign has started to attempt to claim these fees back in full (with claims sometimes totaling in the thousands of pounds).

Background

Banks in the UK often offer a basic overdraft facility, subject to a pre-arranged limit (known as an authorized overdraft limit). However, whether this is offered free of interest, subject to an average monthly balance figure or at the bank's overdraft lending rate varies from bank to bank and may differ according to the account product held.

When a customer exceeds their authorized overdraft limit, they become overdrawn without authorization, which often results in the customer being charged one or more fees, together with a higher rate of lending on the amount by which they have exceeded their authorized overdraft limit. The fees charged by banks can vary. A customer may also incur a fee if they present an item which their issuing bank declines for reason of insufficient funds, that is, the bank elects not to permit the customer to go into unauthorized overdraft. Again, the level and nature of such fees varies widely between banks. Usually, the bank sends out a letter informing the customer of the charge and requesting that the account be operated within its limits from that point onwards. In a BBC Whistleblower programme on the practice, it was noted that the actual cost of an unauthorised overdraft to the bank was less than two pounds. [http://mercury.glentruim.com/cag/]

Amount of fees

An estimated $33 billion dollars were payed by US consumers in insufficient funds and overdraft fees to all depository institutions in 2003. This is according to the June 9, 2005 report by the Consumer Federation of America (available at www.consumerfed.org).

No major UK bank has completely dropped unauthorized overdraft fees. Some, however, offer a "buffer zone", where customers will not be charged fees if they are over their limit by less than a certain amount (Barclays and HSBC being the two main ones, with buffer zones of five and ten pounds respectively). Most other banks tend to charge fees regardless of the amount of the level of the overdraft, which is seen by some as unfair. In response to criticism, Lloyds TSB changed its fee structure; rather than a single monthly fee for an unauthorized overdraft, they now charge per day. Alliance and Leicester formerly had a buffer zone facility (marketed as a "last few pounds" feature of their account), but this has been withdrawn.

In general, the fee charged is between twenty-five and thirty pounds, along with an increased rate of debit interest. The charges for cheques and Direct Debits which are refused (or "bounced") due to insufficient funds are usually the same as or slightly less than the general overdraft fees, and can be charged on top of them. A situation which has provoked much controversy is the bank declining a cheque/Direct Debit, levying a fee which takes the customer overdrawn and then charging them for going overdrawn. However, some banks, like Halifax, have a "no fees on fees" policy whereby an account that goes overdrawn solely because of an unpaid item fee will not be charged an additional fee.

Just the existence of essage boards like [http://www.odnsf.com (www.odnsf.com)] show how unhappy consumers are with these fees.

Legal status and controversy

In 2006 the Office of Fair Trading issued a statement which concluded that credit card issuers were levying penalty charges when customers exceeded their maximum spend limit and / or made late payments to their accounts. In the statement, the OFT recommended that credit card issuers set such fees at a maximum of 12 UK pounds [http://news.bbc.co.uk/1/hi/business/4940250.stm] .

In the statement, the OFT opined that the fees charged by credit card issuers were analogous to unauthorized overdraft fees charged by banks. Many customers who have incurred unauthorized overdraft fees have used this statement as a springboard to sue their banks in order to recover the fees. It is currently thought that the England and Wales county courts are flooded with such claims [http://news.bbc.co.uk/1/hi/business/5187436.stm] . Claimants tend frequently to be assisted by web sites such as the [http://www.consumerforums.com The Consumer Forums] which includes [http://www.consumeractiongroup.co.uk The Consumer Action Group] . To date, many banks do not appear in court to justify their unauthorized overdraft charging structures and many customers have recovered such charges in full [http://news.bbc.co.uk/1/hi/england/manchester/4810490.stm] . However, there have been cases where the courts have ruled in favour of the banks and alternatively struck out claims against customers who have not adequately made a case against their bank [http://news.bbc.co.uk/1/hi/business/6749589.stm (see BBC article)] .

In response to claims by customers to recover their charges, some banks have closed customer accounts, on the basis that those accounts have not been operated within the terms and conditions [http://news.bbc.co.uk/1/hi/business/5056882.stm] which the customer consented to when the account was opened.