You may be aware of this already, but if not: it might be worth suing your bank. If you’ve never paid a penalty charge in your life then you can ignore this post, but if you have then you might find this interesting.

The Office of Fair Trading recently investigated credit card firms’ penalty charges, and concluded that the lenders were breaking the law. The law says that yes, they can levy penalty charges – but it also says that those charges must reflect the cost to the lender, rather than kicking someone when they’re down. According to the OFT, a fair penalty charge is £12; anything beyond that is punitive.

The thing is, the same law applies to banks’ other penalty charges. Here’s a fairly typical example of what might happen if your wages are late one month, through no fault of your own:

Three direct debits and three standing orders are due to come out on your normal payday. You have no wages, so the bank bounces the lot.

• The bank charges you £38 for each bounce. That’s £228.
• The bank charges a “referral charge” because it bounced the DDs and SOs. That’s another £90.
• The lenders whose direct debits were bounced charge you penalty fees. Let’s say £25 each, so that’s £75.

In total, then, your late wages have left you facing £393 of penalty charges, not to mention the extra interest. However, if – as the OFT says – those charges shouldn’t be more than £12 a pop, you should only pay £108: six penalty charges from the bank, and three penalty charges from the lenders whose direct debits bounced.

I’m not arguing that banks shouldn’t penalise misbehaviour, but penalty charges are very profitable – and if you’re in the financial shit then excess penalties can make a bad situation worse. I’ve got some experience of this: in the last four years, on two occasions problems with firms’ accounting systems have left me without income for nearly two months apiece, which wasn’t a lot of fun. When the money finally turned up, almost all of it was eaten by penalty charges.

Now, here’s the good bit. If you’re willing to take on your bank, you can raise an action in the small claims court to get the excess charges back. And you can go back six years, which can mean an awful lot of money. Here’s how to do it:

• You contact the lender and file a Subject Data Access request under the Data Protection Act. This request asks for a breakdown of penalty charges dating back six years, and you have to pay £10 for it. The lender has 40 days to comply.
• You calculate the difference between what you should have been charged, and what you actually were charged.
• You write to the lender detailing the unlawful penalties and asking for the excess to be refunded.
• If the lender doesn’t comply, you take them to the small claims court for the excess fees plus interest. Judging by the posts on moneysavingexpert.com, you’ll almost certainly win.

Nice, eh? Of course, there are some downsides. The following list of sneaky tactics are anecdotal, but I’ve read enough of them on various forums to believe that they’re true:

• Banks are telling customers that the only way to let them know the charges is to issue duplicate statements, at £5 per page, which is a serious amount of cash for six years’ worth of transactions. They’re wrong.
• Banks are telling customers “hey, you agreed to the terms and conditions, so tough”. That’s no defence. If, as the OFT suggests, the T&Cs broke the law, then you’re entitled to the money.
• Banks are ignoring letters asking for refunds.
• Banks are threatening to blacklist customers. They can’t do that, or at least they can’t do that just because of this particular wheeze.
• Banks are closing the accounts of those asking for refunds.

Sounds about right to me. So if you’re thinking of doing this – and it’s worth looking at; people are getting serious refunds if they stay the course and go all the way to the small claims court – you should be prepared to switch banks (which means getting another current account set up before you start this stuff) and you should be prepared for foot-dragging, inaccurate information and the hassle of a small claims court action. Despite all of that, it could be very lucrative. You’ll find out a lot more at moneysavingexpert.com.