Step 1 - Why two different letters?

In certain circumstances the banks may argue that the law on penalty charges is irrelevant. For example, a bank can argue that its terms and conditions of contract enable it to use discretion to pay transactions beyond a customer's overdraft limit. In other words, the bank agrees to honour transactions even although you do not have sufficient funds in your account. As far as its concerend this is a contractual service and the charges applied are the cost of that service. If there is no breach of contract the law on penalty charges cannot apply.

In anticipating this line of defence we believe it logical to distinguish between cases where a bank has declined to pay transactions, as against cases where transactions have been honoured.

Where transactions have been 'bounced' the bank will be unable to rely on the 'service' defence. Such cases are more straight-forward and will turn upon whether you can prove the charges imposed exceed the bank's actual loss in your case.

In cases where transactions have been paid and the bank attempts to rely on the 'service' defence, it may be necessary to place particular reliance on the Unfair Terms in Consumer Contract Regulations.

Paragraph 5 of the regulations provides: "A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer".

Various legal arguments could be made to say that the excessive cost of this 'service' is an unfair term of contract. For example, a customer has no choice in whether to accept or refuse a 'service' which results in a windfall sum for the bank. Would you choose for your bank to honour a £10 switch transaction at a cost of £67? Or, would you prefer that the transaction was declined at no cost to you?