Minister calls for unauthorised borrowing fees to be cut

Banks should cut unauthorised borrowing fees or face a political backlash, the Government warns today.

In an interview with The Independent, the Consumer Affairs minister, Kevin Brennan, said that unless banks heeded public anger ministers would pass new laws ensuring current account charges reflected their costs rather than being "penalty fees".

The Office of Fair Trading – which was today announcing its decision on its legal battle over the charges – lost a landmark case against six banks and one building society last month.

"I think the huge reaction from customers about this shows the banks that they are just on the wrong side of the argument," Mr Brennan said.

"I'm hoping that following the Supreme Court ruling, the banks will understand that when you have such a huge number of complaints from customers it's not in their long-term interests to maintain this approach and they will come forward with voluntary proposals that will end these kind of practices." He added: "But at the end of the day if that isn't possible then I think as a government we have to be prepared to legislate to do something about it."

The OFT will set out its decision this morning. According to speculation, it will raise the white flag in its battle to reduce fees of up to £38 for unauthorised borrowing. While ruling against the OFT's two-year legal battle last month, the Supreme Court hinted that the watchdog might mount a successful case against them under a different part of the 1999 Unfair Terms in Consumer Contracts Regulations.

One million claims have been put on hold pending the outcome of the test case along with potential claims from a further nine million people who have paid the charges in the last eight years.

High-street banks paid out up to £1bn in refunds to customers before the OFT announced the test case in July 2007.

Making clear the Government's anger on the issue, Mr Brennan said that while some banks had lowered the fees recently, those that had not should act now to restore their reputation. He pointed out that the banks' standing with the public was strained, alluding to their need to receive £850m of public money in the recession.

"Notwithstanding the Supreme Court ruling... my own view is that banks need to be much clearer about their pricing," said the minister in Lord Mandelson's Department for Business, Innovation and Skills.

"They have come down a bit voluntarily as banks have come under public pressure on the issue, but if you are overdrawn on your bank account, you are paying interest already on the debt.

"And while it's reasonable for a bank to charge the administrative costs of dealing with an overdraft, I think it's completely unreasonable to levy an additional charge on that."

He reinforced the threat made by the Treasury minister, Sarah McCarthy-Fry, last month that the Government would legislate. He said: "It hasn't been possible in the current Financial Services Bill but the Treasury has made it clear, as I have made it clear as well, that we are prepared to consider legislation if a voluntary solution is not available.

"Clearly legislation takes time to draft and to implement, but it is a serious commitment by Government to act if the banks don't act themselves."

Responding, the British Bankers' Association said some current accounts charged fees while others did not, and advised customers to shop around. "In the terms and conditions it's perfectlty clear how much consumers pay and the case established that bank terms and conditions are in plain and intelligible language," a spokeswoman replied.

The OFT fought its case against seven financial institutions – Abbey, Barclays, Clydesdale, HBOS-Lloyds, HSBC, Royal Bank of Scotland Group and Nationwide Building Society .

Campaigner Martin Lewis, of moneysavingexpert.com, hoped the OFT would fight on. "The banks' deep pockets, filled to a great extent with taxpayers' money, have priced out many consumers from fighting unjust charges," he said. "The only solution is for an institution like the OFT to battle the banks."