Tag: Bank overcharging

Bank overcharging in the UK

Unhappy customers
In the past year some 206,121 people lodged a complaint with the Financial Ombudsman Service (FOS). The FOS does not say how many of these complaints were about the miscalculation of interest charges, but it is safe to say that bank customers are not at all happy with the service they are getting.

‘Most of the complaints we receive about interest miscalculations are to do with credit cards,’ says Philippa Cook of the FOS. Many complaints are the result of the consumer not understanding how interest charges are applied, but if there is a mistake, the FOS sends the complaint back to the bank to work out any compensation – which is not entirely reassuring.

Which? confirms that credit card companies are the worst offenders too. ‘The methods that the credit card companies use to calculate interest are so labyrinthine that even the experts can’t work it out,’ says Martyn Saville, senior researcher at Which?.

Mark Christian, a partner in the Banking Alliance, which runs a bank-account checking service for businesses, says ‘We have been consulting to banks for 25 years in more than 20 countries, so we had a pretty good idea there was a problem. The Gordon Brown-sponsored report from 2001 estimated that £3 billion to £5 billion overcharging is probably the tip of the iceberg.’

Complex equations
Part of the problem in challenging the banks and building societies is that, on overdrafts in particular, interest is charged on the daily cleared balance – which is not the same as the balances shown on your bank statements. It may take up to three or four working days for a balance on your account to be ‘cleared’.

In addition, interest is calculated by reference to a fixed percentage over bank base rate, or in the case of some financial institutions, by reference to its own ‘base rate’, which may be linked to the more volatile Libor (the rate at which banks lend to each other).

This means that in order to calculate the interest charge on an overdraft you need to do a daily calculation using an interest rate that may fluctuate frequently. If the interest rate charged is incorrect, then the daily cleared balances will be wrong too because of the compounding effect of incorrect charges.

If you are checking interest charges on a mortgage, you need to know precisely how the lender calculates charges as this can vary widely. A few lenders still calculate the interest charge for the coming year based on the previous year-end balance outstanding. This means that during the course of the year no allowance is made for monthly repayments of the capital borrowed.

The effect of this is that the true rate of interest is higher than the rate quoted. Other lenders calculate interest on a daily basis and some on a weekly, monthly or quarterly basis. All this makes checking difficult.

Savings accounts are another problem, particularly variable-rate instant-access accounts, where the daily balance can vary widely. In the face of these complications, most people give up unless the mistake is so obvious that it can be spotted without going through these tedious calculations. There are firms that will check your bank accounts using a computer system, but most are based in the US or Australia.

Business accounts
Checking company bank account interest charges is even more complicated, because most firms are charged interest on the daily cleared net amount owing on all their accounts together. This is the sum of all the overdrawn balances on each account less the sum of the credit balances.


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