An Objective Analysis of the Overdraft Fees Case

Sometime during this week, Wednesday (November 25, 2009) to be exact, the new Supreme Court of England and Wales handed down a favourable decision to the banks and building society that had been battling in the country's courts with the Office of Fair Trading (OFT) in the last couple of years. I don't know how familiar readers are with that case. The main issue had to do with the fairness of overdraft fees being charged by the banks and building society. Now this was test case meaning no one was suing anyone except the OFT wanted the question - whether the OFT could assess the fairness of the overdraft fees - answered. The OFT won in the High Court and Court of Appeals. Or should I say the banks and building society lost in the High Court and Court of Appeals. Either way, both the High Court and Court of Appeals thought the OFT could assess the fairness in the overdraft fees. When the decision was handed down by the learned Law Lords of the Supreme Court, many websites and media outlets described the decision as a big blow to millions of consumers/customers. Why? Well these millions of customers/consumers were owed some money as a result of the High Court and Court of Appeal rulings. But their refunds had to be put on hold as the case progressed through the justice system. Now with this ruling, they get zero. Harsh? Not really if you ask me. Bear in mind I have an overdraft to pay as well. Now these banks and building society charge around £39 as overdraft fees per transaction when in fact they spend under £3 pounds when a transaction occurs involving a consumer's/customer's overdraft. You may view this as unfair and rightly so which was why this test case was brought. Now the banks and building society make around £2.6 billion from these overdraft fees. If the OFT are allowed to assess the fairness of those fees and subsequently those fees are reduced significantly or eliminated, the banks and building society will seek to gain that £2.6 billion from other avenues which were originally free. For example, fees for having an account (regardless of the type), fees for all forms of transaction, fees for using the ATM (like in the US) and many other free services we take for granted on a daily basis. I encourage you to view this from an objective standpoint. An overdraft is spending money you don't have at a time you really need the money. Usually in a financial emergency. The bank then says fine, you can use some of our money but you will have to pay this amount of money as overdraft fees. The customers/consumers have a choice, either make sure you always have money in your account or be willing to pay whatever fees for using money which isn't yours to bail yourself out. Harsh as it may sound, it is the right way to go. In a time when people spend and spend without any discipline. I may have to pay my overdraft soon but I am absolutely in favour of leaving the fairness of the overdraft fees to the banks and building society.

Bailout, bailout, bailout...Restructuring

I'm sure I'm not the only person who got interested in the economy, particularly in these times. My interest in the economy and finance actually started before this mess. I was amongst those sucked into the stock bubble (i.e. those who thought stocks only rose). I called stock trading the rich man's lottery. Because honestly it was a gamble. How could one be sure that the stock they purchased for $10 will be $15 dollars at the close of the trading day? Lots of factors had to swing in one's favour for that to happen and it was someone's job to predict risers and fallers on the stock exchange so maybe it isn't a lottery. Ah call it what you want I still think it is the rich man's lottery. So I got sucked in before all this mess so you can imagine how pissed I am to realise my investment has been a loss. But everything happens for a reason right? And I guess the reason was that I became interested in the market.

So then financial institution after financial institution started collapsing. People were withdrawing money out of their accounts like there was no tomorrow. Ok maybe not like that but investors were worried about investing. Then the government decided to step in because the banks decided to stop lending or at least slow it down and because the banks were "too big to fail". The banks (institutional investors) had made more losses than anyone could have imagined. In England, the government had to step in to save Northern Rock after it failed to find a buyer for the bank. Then it bailed out the Royal Bank of Scotland (RBS) and Lloyds TSB and HBOS (Lloyds). Billions of pounds of tax payers money was used to bail out these banks. So it is only right the tax payer knows what is going on with these banks that were bailed out with its money and also whether the money used to bail out these banks will ever be returned to the tax payer (we know this never gets into the tax payer's account or pocket). An on-going debate in parliament for about a month was restructuring the financial system domestically and internationally. Brown argued that if this wasn't done internationally, then all banks will do is move where the rules are relaxed. Also, separating investment banking from retail/commercial banking was not the answer as both types of banks failed in the last year (Northern Rock and Lehman Brothers).

Then in a week, the good news comes. The EU Commission agrees to the restructuring of Northern Rock. The bank will now be split into a good bank and a bad bank. Just like the name, the good bank will have all the good assets of the bank i.e. the good loans and mortgages whilst he bad bank will have all the toxic assets such as the soured loans. The government will then find buyers for both banks. You may ask yourself, who will buy the bad bank? I would if I had money and for very very very cheap too. I don't think the government will have a strong negotiation position with regards to the price of the bad bank. The good bank, of course, will have a good price. More good news comes this week when the Commission further orders a shake-up of RBS and Lloyds. Basically, RBS will have to sell its lucrative insurance business including Direct Line, Churchill and Green Flag as well as 318 branches. Further, it will sell its NatWest brand in Scotland, RBS Insurance and Global Merchant Services, its card payment business. Lloyd on the other hand must sell 600 branches, TSB, its mortgage lender Cheltenham & Gloucester, and the Intelligent Finance online bank.

I totally agree with this shake up. Virgin and Tesco have been tipped to take advantage of all this restructuring. And why shouldn't they? Some analysts have said that Lloyds have had it easy compared to RBS. Really? All that money that was pumped into RBS? RBS definitely deserves this shake up. They can't eat their cake and have it. Others are worried that the big banks will be back in five years to buy them up. Everything is a cycle, ain't it?