Banks on the penalty spot

This week the Office of Fair Trading told banks that £25 late payment charges on credit cards are excessive. So can customers now refuse to pay them? Barrister Richard Colbey, who has long highlighted the illegality of penalty charges, says you should dispute the fee - and adds that you might be able to claim back anything you have paid over the past six years

This week's announcement by the Office of Fair Trading that it will take action against banks which continue to levy excessive charges on credit card customers who pay bills late is a belated, if welcome, step towards ending penalties on customers.

As long ago as February 1995 the Guardian's money pages first advised about the illegality of these charges while the OFT and other consumer groups ducked the issues. Last August Which?, as the Consumers' Association now calls itself, published a report suggesting banks should change their charging practices, but making no reference to the illegality of some charges.

Around the same time the OFT finally announced an inquiry into credit card charges and Jobs & Money revisited the legal arguments. Other media organisations reported our observations. A group of dissatisfied bank customers formed a website,, where tips are exchanged by those involved in legal battles with banks.

Cornish Lib Dem MP Andrew George has been in contact with the group and taken up cases where such issues have arisen. He told me this week that he has found the Treasury a surprisingly useful source of support.

He described the OFT's approach as "over-academic". The OFT has now written to eight of the biggest banks, including Barclays, NatWest, HSBC and Lloyds, saying its provisional view is that their charges are legally unenforceable. It has said they should reduce the charges to those which compensate for "certain types of loss that were reasonably foreseeable at the time that the contract was made".

This means that charges should reflect actual costs to banks caused by late payment, which is usually just the postage, stationery and minutes, if not seconds, of staff time involved in the sending of a computer-generated letter.

Rather unhelpfully for all concerned, the OFT has not specified what that amount should be - but there are hints that the £20-£25 routinely charged by many is too high.

The banks have three months to either do what the OFT requires or make further representations.

Banks don't act quickly except when it is in their interests to do so. They will doubtless point out that it has taken the OFT itself nearly a year to reach even a provisional view, and summer holidays are always a good excuse to delay.

The likelihood is banks will get away with continuing to levy dodgy charges at least until the end of 2005. The initial reactions by the banks this week do not suggest that there is any real answer to the claim that the charges are illegal.

Barclays, for instance, stated that the fees could be avoided if customers made the minimum payment. But that completely misses the point that the charge is disproportionate to the loss that failure to pay causes the bank.

The OFT's views, though, should provide ammunition for anyone who does face credit card penalty charges. In practice the best thing to do with a disputed charge is to refuse, point blank, to pay it.

Those who are in a position to do so should calculate what is undisputedly owed and send a cheque for that much in full and final settlement. It will inevitably be accepted and any further liability brought to an end.

The next best thing is to pay as much of the bill as possible, and send a letter saying that the penalty charges will not be paid until their legality has been determined. While the banks may try to levy interest and even penalties on the unpaid sums they too should not be paid.

The banks may argue that until the OFT makes a final ruling the charges are legal. That would not be correct. The OFT does not make the law. It merely has a power to comply businesses to comply with existing laws.

If the banks do agree - or are ordered by a court - to stop levying these charges, the effect will be that they always have been illegal.

Anyone who has paid them over the past six years will, on the face of it, be entitled to a refund.

Which? estimates credit card penalty charges gross the banks about £400m per year. While the likely outcome is a reduction rather than a complete abolition, the implications for the banking industry are such that is unlikely to go down without a fight on this one.

What the banks say

Banks and credit card companies are saying very little publicly following the Office of Fair Trading ruling on excessive penalty charges.

Behind the scenes they are dismayed by the OFT ruling and, if fees are cut, say customers who pay on time will subsidise late payers.

MBNA, which not only operates its own cards but is the company behind the Abbey card and a host of others, says it continued to believe its charges are "fair and transparent".

But it is keen to emphasise it has been in discussions with the OFT since the watchdog launched its review and will continue to discuss how to satisfy its concerns.

MBNA was not alone in refusing to say how it would respond to customers if they refuse to pay penalty charges. The credit card firm echoed other banks when it said it is a matter between the bank and its customers.

The charges

Late payment | Exceeding limit | Bounced payment

Barclaycard £20 £20 £20

Halifax-BoS £25 £25 £25

Lloyds TSB £20 £20 £20

RBS/NatWest £20 £20 £10

HSBC £20 £20 £5

Capital One £20 £20 £20

MBNA £25 £25 £25

Virgin £25 £25 £25

M&S &More £15 £15 £15