Banks repay £1 billion in unfair charges after consumer revolt

Britain's biggest and richest bank, HSBC, told the City yesterday it had handed back £120million to customers in the past six months alone.

This is the first time a major UK bank has put a figure on the scale of the refunds and is far higher than City analysts had been expecting.

The rest of the industry will reveal over the next few days that similar huge refunds have been made to hundreds of thousands of account holders.

Given HSBC's UK market share, the total given back to wronged customers so far will be more than £1billion - five times higher than industry forecasts.

Despite the huge sums, banks are on course to reveal record profits of more than £20billion for the first half of the 2007 financial year.

They have been introducing a raft of charges and have hiked interest rates on credit cards and loans in order to boost profit margins. They have also adopted a get-tough policy on those in debt, fuelling a rise in the number of court debt recovery cases, home repossessions and personal bankruptcies.

HSBC said its profits in the first six months of the financial year rose 13 per cent to £6.97billion.

The bulk came from commercial banking and a bumper performance in Asia, helped by buoyant economic growth in the region. This helped outweigh a 34 per cent fall in profits in retail banking at its European division, which can at least partially be blamed on the scale of refunds to customers.

The refunds on overdraft charges have been made after the Office of Fair Trading signalled last year that penalties of up to £39 for bouncing a cheque were unfair and illegal. This triggered an avalanche of claims from hundreds of thousands of bank customers for the refund of charges.

To date, HSBC and other banks have paid up rather than defend the validity of the charges in the courts.

However, the industry, including HSBC, has agreed to test whether the charges are lawful through a court case that will set a precedent for all such refund claims.

The case was announced by the industry and the OFT last week and is likely to take up to a year to be resolved.

In the meantime, the banks have put repayments on hold in a move that will - at least temporarily - reduce the haemorrhaging of cash.

This may be only a temporary reprieve. If the OFT's view is upheld, the banks may be forced to automatically refund billions of pounds taken from customers going back six years.

The banks have used a number of stalling tactics and dirty tricks, including making false statements to customers, in an effort to limit repayments. Last week, the Financial Services Authority launched an inquiry into the mishandling of refund claims by several leading banks.

At one time, HSBC was retaliating against some customers claiming refunds by closing their accounts, a ploy that was dropped after being condemned by City watchdogs.

HSBC said yesterday that the scale of the repayments was evidence that it is putting customer interests first.

Chief executive Michael Geoghegan said: 'This is an industry-wide issue and the size of the refunds that we have made demonstrate our commitment to treating our customers in a fair and transparent matter.'

HSBC said it considered its charges were 'valid and enforceable', although it said it was impossible to predict the outcome of the legal action.

Any court ruling that the penalty charges are illegal could signal a wholesale change in the way banks charge their customers. HSBC is in the vanguard of controversial moves to introduce fees on current accounts in this country, so killing so- called free banking.

Executives at the bank have described the introduction of charging as 'inevitable'.

The bank's telephone and Internet subsidiary, First Direct, became the first mainstream bank to force charges on thousands of its customers earlier this year with the introduction of fees of £10 a month.