OFT calls for fairer interest payments

Banks should pay interest to customers while they process cheques and electronic payments, the Office of Fair Trading said today.

As part of a number of proposals for key changes to the Banking Code, the OFT recommended the abolishment of the current system under which banks do not have to pay interest to their customers while they are waiting for electronic payments to clear.

Currently, when it comes to standing orders, telephone banking and internet payments, the money that the customer has asked instructed the bank to pay out tends to be held by the bank for up to two days between the moment when it is deducted from the payer's account and the moment it is paid into the recipient's. During this period (known as the float), the bank is free to invest the money and earn revenue for itself.

The OFT is now calling for customers to go on receiving interest on their money until it is credited to the payee ? or, if the customer is overdrawn or will become overdrawn as a consequence of making the transfer, they should not be charged overdraft interest on the amount of the payment during the float period.

With cheques, funds are available to the receiving bank on the second day following the day of deposit and the OFT is calling for interest to be paid, where applicable, from this day at the latest.

The OFT also recommended changes to the check clearing system which would require banks to pay interest on checks paid into their customers' accounts on the second day following deposit. It suggested, too, that there should be greater clarity for customers about how long it takes for payments to clear and how quickly funds are received.

The banking code, first launched in 1991 and now in its sixth edition, is a voluntary code designed to protect customers from poor customer service, and signed up to by most banks and building societies in the UK. It currently provides service guidelines on current accounts, personal loans, savings (including Isas) and credit cards.

John Vickers, the chairman of the OFT, expressed his support for the code, but indicated the areas in which he believes it need to be tightened up. "Self-regulation, provided that it is effective, has a key role in ensuring that markets work well for consumers," he said. "But self-regulation through the banking codes needs improvement. Customers, not just the banks, should get some benefit from the float. And customers should get clearer information to help guide their choices about banking services."

Perhaps in response to the now regular reports of the UK's spiralling personal debt crisis, the OFT also went on to recommend that the code be revised to promote responsible lending, with particular emphasis on the need to assess customers' ability to meet repayments before money is lent.

The OFT's proposals were made in response to an independent review of the banking code currently being carried out by Professor Elaine Kempson of Bristol University, and due to close on 28 February. Commenting on the proposals, the British Bankers Association said: "We all support greater transparency for consumers and the review of the banking code is itself an open process.

"This is just one of many responses we have received and they will be reviewed alongside other responses by Professor Kempson and her report is due in September."