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About That Overdraft: See You in Court


Brits are suing over the fat fees banks charge to cover a dud check. The consumer ire could spread to the U.S.

British banks, like their U.S. counterparts, love overdraft fees—those levies they collect for honoring a check when there's not enough money in the account to cover it. British overdraft charges average $57, nearly 70% more than in the U.S. Last year, banks in Britain generated some $7 billion in overdraft charges and excess-borrowing fees, says the Office of Fair Trading, Britain's competition watchdog.

Good deal for the banks—except that customers have been suing them like crazy, claiming the fees violate consumer-protection laws. Pressed by the litigation, Britain's top five banks refunded $810 million to customers in the first half of 2007. Now, the Office of Fair Trading has brought suit against the top banks, a move that could affect similar battles in the U.S.

On Jan. 16, Britain's High Court began hearing a case to decide whether the fees are fair. HSBC (HBC) (HBC)Chairman Stephen Green told analysts in November that the outcome could "change the economics of retail banking" in Britain.

If the banks are humbled, it will be because of the zeal of consumer activists. One is Peter Brown. Four banks have refunded the history lecturer from the University of Wales a total of $13,000 in overdraft fees and related penalties from four banks. He co-founded legalbeagles.info, a Web site that offers claim forms "for the self-litigating consumer." Says Brown: "Taking your bank to court is incredibly empowering."

Activists argue that the banks' overdraft charges far exceed the costs incurred—about $9—when customers overdraw their accounts and that banks shouldn't reap such huge profits. Britain's banks argue these charges pay for a service provided to customers, so the fees are not covered by consumer protection laws that put a cap on penalties. The British Bankers' Assn. warns that if the ruling goes against the banks, standard perks such as free checking and no-fee ATM service may go by the board. "There is no consequence-free result," warns Angela Knight, the association's chief executive.

What about the other side of the pond? A bill in Congress would limit U.S. banks' use of overdraft-protection programs. American banks are balking. But if these charges are banned in Britain and the banks there remain profitable, "it will undercut the U.S. banks' argument that they must impose these charges or go out of business," says Elizabeth Warren, a professor and bankruptcy expert at Harvard Law School. "The British may give us an example of profitability on fairer terms."

Capell is a senior writer in BusinessWeek's London bureau .

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