Charging the banks

In recent years, thousands of bank consumers in the UK have been reclaiming their bank overdraft charges through the county and sheriff courts. The slow trickle of claims some years ago rapidly turned into a flood as customers became aware that many banks were charging up to £39 each time they exceeded their overdraft limit, despite the estimated cost to banks amounting to just £2.50. A further irksome thought for disgruntled consumers was the estimated £3.5 billion banks raise each year from the charges.

The banks have consistently argued that the charges are fair and offset the cost of bad debts incurred by customers. Moreover they retorted that the revenue from overdraft charges allows them to continue offering “free banking”.

The avalanche of claims prompted the Office of Fair Trading (OFT) and the seven high street banks to seek clarification on the charges from the Commercial Division of the High Court in London. The action was raised in July last year, at which time the Financial Services Authority (FSA) agreed to put all new and existing claims on hold until the test case was resolved.

All county court cases in England and Wales were put on hold pending the test case decision. However in Scotland a small number of cases have been allowed to proceed because the FSA waiver is not binding in Scotland and some sheriffs observed that the test case would not necessarily address Scots common law. UK bank consumers have been eagerly awaiting the High Court judgment to see whether bank charges would be allowed to be assessed by the OFT, and then more importantly whether or not the charges are fair.

The jurisdiction ruling

The initial judgment by commercial judge Mr Justice Andrew Smith finally arrived in late April: [2008] EWHC 875 (Comm). The judge decided that the OFT may assess whether or not unauthorised overdraft charges are fair. His ruling allows the OFT, under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR), to assess whether the charges come within the scope of reg 5(1), which provides: “A contractual term which has not been individually negotiated shall be regarded 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.”

If the High Court determines the charges unfair, the OFT as “general enforcer” would proceed to apply for enforcement orders to serve on the banks for infringements of the UTCCR. The banks are currently taking a bold stance should this hypothetical situation arise, insisting that ultimately it will still be the courts who have the final decision to issue the enforcement orders, not the OFT.

The judge did emphasise that his decision would not mean the terms imposed on customers by the banks were necessarily to be regarded as unfair under the UTCCR. Aside from the main preliminary issue of the OFT’s jurisdiction to rule on the fairness of the charges, there were several other issues which required to be clarified.

“Plain intelligible language”

The OFT also asked the judge to decide whether the banks’ contracts were in “plain intelligible language”, arguing that the banks were under an obligation to explain everything consumers would require to know about maintenance of their accounts. The banks argued that their terms and conditions only required to be easy to understand to meet this test. The significance is that reg 6(2) of the UTCCR provides: “In so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate –  (b) to the adequacy of the price… as against the goods or services supplied in exchange.”

The judge agreed with the banks and decided the contracts were in plain intelligible language, with a few minor exceptions. Moreover, he observed that consumers do not need “an education in the full complexities of banking systems”. However he rejected the banks’ argument that as the terms are in plain intelligible language they come within the scope of reg 6(2) and are exempt. The banks were rather perplexed by the decision on this issue. However they may still have the last laugh in subsequent hearings. The banks could argue that as the relevant terms have been held to be easy to understand, there is an implication that they are fair, and more crucially, have been drafted in “good faith”, which is the underlying theme of the UTCCR.

Common law penalty?

A further question asked by the OFT was whether the charges are “penalties” at common law and therefore unenforceable. Penalties are charges for breach of contract where the financial recovery to the innocent party is extravagant in comparison with any accurate pre-estimate of loss, and are void.

Mr Justice Smith decided that there could not be a penalty for breach of contract where there was no breach. He relied on Lloyds Bank plc v Independent Insurance Co Ltd [2000] 1 QB 110, where Waller LJ observed that prima facie, a customer is not in breach of his contract with his or her bank if he or she gives instructions to make a payment without having the necessary funds or facility to cover the payment (whether at the time when the instructions are given by the customer or when they are received by the bank or both).

Moreover the judge held that penalty charges do not apply if the obligation is to pay for a service or on an event other than a breach, even if the service is supplied or accompanied by a contractual breach. Further he was of the view that the banks’ terms and conditions were drafted in such a way that the customer was making a request of the bank and the bank merely responding.

However the judge did note that the terminology used in the banks’ documentation had only been introduced recently. Therefore the wording referred to in the judgment is only relevant to the current bank terms and conditions. The terms relating to charges applied many years ago have been varied many times up to the present day. Since many consumers are reclaiming charges from as far back as 2002 or 2003, it is not the current terms but the terms dating back over several years which will apply. The historical terms are to be debated at the appeal hearing to see whether they are capable of being interpreted as conferring a contractual obligation on a customer, in which case they might be classed as penalties.

It will be interesting, should any of the Scottish cases proceed to proof, to see whether a pursuer can persuade a sheriff, first that the charges arise from a breach of contract and secondly, that they are penal under Scots common law. It is not beyond the realms of probability; the judgment is not binding on Scots courts but merely persuasive.

Remuneration for service?

Mr Justice Smith found in favour of the OFT submission that if a bank refuses to pay out on a cheque then no service has been given. The judge held that the service the consumer requested was limited to providing an unauthorised overdraft and was not consideration of a consumer’s request to go over their limit. But he accepted the banks’ position that if they do pay out on a cheque, that should be regarded as “service” for the purpose of reg 6(2) because it is part of the essential service of operating a current account.

The banks had further contended that the unauthorised overdraft charges could not be assessed by the OFT because they were fees paid by a customer in exchange for specific services provided by the bank. However Mr Justice Smith asserted: “I am unable to accept that either the Paid Item Charges and Guaranteed Paid Item Charges or the Overdraft Excess Charges are the price or remuneration or even a part of the price or remuneration that the customer pays in exchange for lending services”. The banks’ argument that the overdraft charges were fees paid for receiving a whole package of services was also brusquely swept aside: “I do not consider that the payments are made in exchange for the whole package of services supplied by the bank when it is operating a current account.” The banks were disappointed by the decision on this issue, as prior to the hearing they had been confident that this particular argument might persuade the judge.

A long way to go

The High Court judgment has brought the OFT and consumers one step closer to winning this gruelling legal grudge match. However the banks have and a hearing is anticipated to take place in autumn of this year. Before the appeal has been heard, the OFT is expected to release its initial findings on a fair level of charges in July. It launched a formal investigation into the fairness of overdraft charges last year, but has yet to make the widely expected public announcement that it believes the charges are excessive. At the case management discussion relating to the banks’ appeal, Mr Justice Smith was critical of the OFT for the lack of progress and pressured it to complete the investigation without further delay.

Should the OFT overcome the jurisdiction issue then the main issue can be contested: are the bank charge terms and conditions fair under the UTCCR? For the banks, this is the £3.5 billion question. It would seem on the face of it that the charges, interpreted in accordance with the UTCCR, are likely to be found to be unfair. The fight is anticipated to continue over the next few years, with both sides slugging it out in the Court of Appeal and finally the House of Lords. UK consumers will now need a successful final ruling on the OFT’s jurisdiction before the ultimate round can determine whether the charges are fair. If the banks lose their appeal, consumers will be hoping that the OFT can land a knockout blow in the concluding round and finally allow them to reclaim their bank charges.