Free banking 'under threat

Charges for consumer banking could be the consequence of yesterday's ruling that banks and credit card companies should cut the penalties they charge defaulting borrowers.

The companies, which routinely charge up to £25 for late card repayments and unauthorised overdraft, were told by the Office of Fair Trading (OFT) that they must cut the fees to a maximum of £12. There are fears that they may seek new ways of making the millions generated by these charges.

Richard Thompson, the author of PricewaterhouseCoopers' annual study of the credit card market, warned yesterday that if providers were forced to reduce penalties there could be "a waterbed effect, whereby costs are simply transferred from one group of consumers to another".

The banks were unwilling to comment on what impact the ruling may have on their charging structures. Two involved in the OFT's research, HBOS and Lloyds TSB, said they would examine the ruling before making any decisions.

And analysts have said they do not expect any announcements before the banks give trading statements in early June.

But if the companies do cut charges, many expect other costs to be introduced.

Nick White, head of personal finance at price comparison website uswitch.com, agreed that it was "unlikely" credit card providers would write off the money they would lose through reducing penalties and that interest rate rises could be in the pipeline.

"Consumers could see the APR on their credit cards being raised by at least 2%," he said.

In March, analysts from Credit Suisse said they suspected that increases in penalty charges had been "an important driver" of non-interest income earned by UK banks. Companies may look to introduce other charges if they were told to reduce fees, they added.

Several banks had increased charges by around 10% in the second half of 2005, driving up non-interest profits, Credit Suisse said.

"The banks could look to partly offset any detrimental ruling by, for example, increasing interest rates," its report concluded. "Another option would be to introduce charges for owning a current account - extremely uncommon in the UK but prevalent in many other countries."

Outrage

The research said that charging for current accounts "would be likely to result in public outrage", but some say that universal charging would be fairer.

The Consumer Credit Counselling Service (CCCS) said yesterday that consumers who had fallen into debt had been subsidising some of the better deals on the credit card market.

"We have been worried for some time that the burden of sustaining the credit card system was falling too heavily on people in debt while most of us were happy to enjoy a free service at their expense," said its chairman, Malcolm Hurlston.

"Of course, turkeys don't vote for Christmas and the high proportion of consumers who enjoy a free service now won't want to be charged, but we hope the end result may be a return to annual fees which spread the costs more fairly among users."

Meanwhile, uswitch.com's Nick White said increasing APRs across the board would be fairer for everyone.

"While this may seem like a step backwards for consumers at first, we believe that it is important that they are told how much they are going to be charged for their borrowing upfront, therefore allowing them to make a more informed decision when choosing a credit card provider," he said.

"We welcome any developments that improve the transparency of charges, and make it easier for consumers to compare products and how much they are likely to cost."