Got an overdraft? The bank probably owes you

Article written in Accountingweb on 5-Dec-2003

After his company went into administration, Jeff Lampert gew concerned about the extent to which bank overcharges had contributed to its demise. That led him to found CBBA, a specialist auditor of bank charges. Here he explains some of the ways in which bank statements can go astray.

My introduction to the world of bank interest auditing was therefore as a curious client. As the former chairman of Heritage plc, I grew concerned that bank overcharges were a major factor in the demise of what was a highly geared company.

According to the Cruikshank Report prepared for the Treasury in 2000, small businesses are overcharged between £3bn-£5bn every year by the major banks.

The first thing I learnt as I looked into the issue was how complex the calculations were. Very few SME financial officers could be expected to grasp the complexities of the clearing cycle, dealing with weekends and public holidays, cash or transfers and cheques.

Then there were the frequent changes in base rate, or the even more frequent changes in LIBOR (London ???). Add to that the different off-set arrangements for balances between various accounts, and I began to comprehend why Heritage’s very substantial interest charges had never been checked.

The bank statement is the only “invoice” a SME will receive for interest charges. It is also an unusual invoice because it is invariably “paid” or taken out of the bank account before it is rendered.

It is not the auditor’s responsibility to check invoices.

There are therefore a substantial number of overcharging errors. Around 70% of the accounts checked by specialist auditors such as CBBA reveal errors where clients have been overcharged.

After having some of Heritage plc’s statements audited, I realized there was firm of auditors I could have taken those statements to, had Heritage still been trading. CBBA was created to fill that gap by developing a simple and rapid way to input and check the bank statement data.

Prior to the mid-1990s many of the banks used relatively junior staff and calculators to establish the amount of interest payable. The local branch normally did this. There were a significant number of miscalculations.

When they are identified, the bank's client is entitled to ask for restitution equal to the value of the original error plus compounded interest from the date of the error. Assuming a client was over-charged £10,000 in 1990, and assuming the client constantly used their overdraft, negotiated say at 2.5% cent over base rate, CBBA would claim around £35,000 in 2003 on that client’s behalf.

More recently the major banks have moved to centralised and computerised calculations. This has moved the focus of the errors from the actual calculation to the basis of that calculation. A frequent error is around UBR (Unauthorised Borrowing Rate). This is the rate of interest charged when the client exceeds the borrowing limit mentioned within the facility letter. Sometimes a higher limit has been agreed, which is not reflected in the interest being charged.

Sometimes the margin over base rate (or LIBOR) is not as agreed in the latest facility letter. Sometimes a client will obtain a reduction in this margin, which is not reflected in the amount being charged.

Sometimes the calculations are just plain wrong.

Although CBBA is constantly learning new reasons for overcharging, there is not much mileage in demanding explanations and seeking to apportion blame. By and large, bankers respond to a well argued case backed with solid evidence designed to get the client a refund.

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