OFT targets credit card penalties

Should you be obliged to pay a penalty of £20 or more for being just a few days late in settling your monthly credit card bill?

Legally, the grounds for pursuing such payments are questionable, so it should come as no surprise that the Office of Fair Trading (OFT) now appears to be targeting the issue.

Credit card giant MBNA recently filed a company report in the USA explaining it may have to reduce its late payment charges in the UK.

The bank may even repay charges already levied, depending on the outcome of the OFT investigation. MBNA received the demand last month.

The OFT confirmed that it has asked MBNA and others for information about credit card charges as part of a review it is conducting into the UK credit card industry, but added that its probe is not an indication that it has uncovered any evidence of wrongdoing. MBNA says it is currently responding to the OFT on the matter.

Late payment charges are common across nearly all credit card companies. The banks' computers generate a letter the day payment is due, send it out and add £20-£25 to the bill, on top of interest, for a process that it is likely costs a few pennies.

Some banks claim that the charge relates to actual costs. Others take the line that the charge is a deterrent to customers. That probably reflects the economic reality but amounts effectively to an admission that the charges are not legally enforceable.

A contractual term that requires a person in breach, such as a late paying card customer, to pay a predetermined sum is a penalty clause, unless that sum genuinely relates to the amount of damage caused by the breach.

This was established in 1915 after the fledgling Ford Motor Company required dealers to pay £250 should they sell its cars at less than the list price.

When Ford attempted to recover this sum from a garage that had done that, the Court of Appeal decided the sum was arbitrary, bore no relation to the loss and did not need to be paid.

Indeed, I incurred a late payment charge a few months ago when a bill from the Bank of Scotland arrived while I was on holiday. I wrote telling the bank it was an unenforceable penalty clause and that I had no intention of paying it. I received, as I believe any customer making such a protest would, a letter withdrawing the charge.

But it is wrong that people with a degree of confidence and legal knowledge escape charges that can, in the absence of effective regulation, be imposed on the people who can least afford to pay them.

If the OFT presses ahead with its enquiry into these charges, they may be possibly be abolished altogether or reduced to an amount, perhaps £5, that the banks can show they actually incur.

It will be interesting to observe how tough the OFT will be on this issue. Since the appointment of present director, John Vickers, it appears to have sharpened its teeth. It was quite cheering this week to hear the OFT's refusal to let auditors limit their liability, which The Institute of Chartered Accountants described as "blatantly wrong" and "the worst piece of work ever seen from the OFT".

The industry's main argument is that a cap on liability would make medium size accountancy firms more able to take on the work of auditing big companies and break the virtual monopoly the big four firms have on work for FTSE350 companies. Yet the fear of massive legal action affects the big firms as much as their smaller competitors.

More importantly, the public has a real interest in retaining the present unlimited liability. Auditors effectively arbitrate on whether or not a company's books should be passed. Unlike most arbitrators, though, they depend on the goodwill of the company they are making judgments on, for repeat business.

The most effective way of sorting out the problem would be to stop companies choosing their own auditors. There's not much support in the worlds of big business or accountancy for that one, so the present system - with a remote risk of ruination if really bad things are nodded through - is the only way auditors' eyes can be kept on the ball.

· Richard Colbey is a barrister