Watchdog defends attitude to banks

The trading watchdog has defended its decision not to impose regulation on banks to make current accounts fairer for consumers.

The Office of Fair Trading was heavily criticised by consumer groups last month for not taking a harder line on banks over the unauthorised overdraft charges they levy on customers.

Instead it agreed with the banks that they would introduce changes to overdraft charges during the coming two years, including offering customers the chance to opt out of overdraft facilities.

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The move, which followed a three-year investigation and a High Court test case on the issue, was branded "weak" and "pointless" by consumer bodies.

But Philip Collins, OFT chairman, defended the group's stance this week, saying in some cases working with businesses to agree voluntary changes produced "better, quicker results", than the use of enforcement powers or regulation.

Giving the annual Curry Lecture at the Cass Business School, he said: "New regulations would have taken some time to put into place, which would have hurt consumers and also potentially act as a disincentive to banks' own efforts to improve.

"Regulation would also risk constraining innovation and focus the efforts of bank managements on influencing the rule-making rather than implementing improvements in services to consumers."

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But he added that voluntary changes usually needed to be backed up by the threat of enforcement action or regulation.

Mr Collins also defended the OFT's decision not to pursue a further test case on the issue under unfair contract regulations.

He said: "When we considered all of the risks and resources involved, we decided not to continue the investigation.

"Our concerns were that any such investigation would be narrow in scope, appeared to have a low probability of success and, in any event, would only make a limited contribution to achieving the OFT's objectives."

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He added that since the OFT began its investigation into the current account market in 2007, there had been "significant improvements" in unauthorised overdraft charges.

These improvements included a 50 per cent drop in the level of charges levied for unpaid items, greater transparency in charging structures, and a shift towards charging customers for each day they were in the red without permission, rather than each transaction.

Some providers have also introduced tools to help consumers manage their money better, such as text message alerts when they are nearing their overdraft limit and the ability to opt out of going into unauthorised overdraft.

But he added that while the OFT thought the best way for markets to function was for providers to develop products that consumers wanted, financial products often appeared to have been designed to benefit suppliers rather than customers.

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He said: "They supply a steady income stream and substantial profits, but are not necessarily providing what the consumer actually wants or expects."

Responding to reports that the OFT was considering carrying out an investigation into investment banks, Mr Collins said the watchdog was talking to "various participants" about how well some City markets work.

But he said: "It is not yet clear where this work will lead, or whether our initial interest will lead to anything at all."

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