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Bank Charges For Unauthorised Overdraft by Professor Nelson Enonchong
HomeNews PublicationsPublicationsBank Charges For Unauthorised Overdraft
The Office of Fair Trading (OFT) has won the second round in its much publicised bank charges joust with the major banks providing personal current accounts (the Banks). In Abbey National plc and ors v. Office of Fair Trading [2009] EWCA Civ 116 the Court of Appeal dismissed the Banks’ appeal against the judgment of Andrew Smith J [2008] EWHC 875 (Comm). The stakes are high in this litigation. If the decision of the Court of Appeal stands, the OFT will assess for unfairness the charges that the Banks apply for unarranged overdrafts. And if, upon assessment, the charges are found to be unfair, thousands of customers may be entitled to refunds (in total estimated to be about £1bn). In addition the Banks could lose a not insignificant source of revenue (estimated at about £2.6bn a year). This note first explains the background to the litigation before examining the reasons for the decision of the Court of Appeal and then considering whether individual complainants are now closer to compensation from the Banks.
The Background
This case is about charges made by banks to their customers who have personal current accounts with them when banks are requested or instructed to make a payment for which they do not hold the necessary funds in the account and is not covered by a facility arranged with the customer. Even before the credit crunch started to bite, many thousands of bank customers were challenging these charges as unfair. In April 2007 the OFT announced its investigation, under the Unfair Terms in Consumer Contracts Regulations 1999 (“the 1999 Regulations”), into the fairness of terms providing for unarranged overdraft charges. In addition to the OFT investigation, a large number of actions have been brought by individual customers challenging the charges in county courts.
On 25 July 2007 the OFT, liaising closely with the Financial Services Authority (FSA), entered into an agreement with seven banks and one building society which together constitute the largest providers of retail current accounts in the UK. The purpose of the agreement is to bring a test case in order to ensure an orderly and timely resolution of the legal issues associated with the OFT’s investigation. On the same day the FSA, in order to support the test case process, granted a waiver so that the Banks (and the Financial Ombudsman Service) do not have to process customer complaints about unarranged overdraft charges until the test case is resolved. Furthermore, to the same end, the county court claims by individual customers have, for the most part, been stayed for the time being pending the outcome of the OFT’s case.
The principal issue
Two of the Banks (Abbey and HBOS) sought permission to appeal against findings by Andrew Smith J. that particular terms in their contracts were not in plain intelligible language. The Court of Appeal refused permission. Both appellants had accepted that if their main appeal failed, this aspect of the case would be academic.
The principal question in the main appeal was whether or not the OFT was entitled to assess the fairness of unauthorised overdraft charges made by the Banks under the 1999 Regulations. The Banks’ contention was that on the true construction of regulation 6(2)(b), an assessment of the charges imposed pursuant to the relevant terms was prohibited in the circumstances of this case. The judge held that it was not. The Banks argued that the judge was wrong so to hold. But the Court of Appeal decided that the judge was right. Why? To understand the reasons it is helpful to start with the provisions of regulation 6. Regulation 6(1) provides that “the unfairness of a contractual term shall be assessed” taking into account certain factors. However, regulation 6(2) declares that:
“In so far as it is in plain and intelligible language, the assessment of fairness of a term shall not relate –
(a) to the definition of the main subject matter of the contract, or
(b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.”
Charges: Price for Services?
The Banks argued that the charges imposed are exempt from assessment for fairness because they are the price for services rendered by the Banks when they process but do not pay upon customers’ instructions. The judge rejected that contention and held that the real and essential service supplied by the Banks under their contracts with their customers is that of paying upon the customers’ instructions and the Banks’ procedures whereby they deal with their customers’ instructions before making payments or when they decide not to pay were ancillary and incidental to the service of paying in accordance with the mandate. By contrast, the judge held that the Banks do supply “services” when they pay upon their customers’ instructions. The question was whether the charges imposed are the price for these services within the meaning of regulation 6(2)(b). The Court of Appeal held that that depends on whether these charges are part of the essential bargain in a current account contract.
Regulation 6(2)(b) to be construed narrowly
In order to decide whether a particular term falls within regulation 6(2)(b), in that it forms part of the essential bargain, the court must first identify the correct approach to the construction of the 1999 Regulations. To this end, after examining the relevant provisions of Council Directive on Unfair Terms in Consumer Contracts 1993 (“the Directive”), the decision of the House of Lords in The Director General of Fair Trading v. First National Bank plc [2002] 1 AC 481, the travaux préparatoires of the Directive and a number of academic writings, the Court of Appeal concluded that article 4(2) of the Directive (the equivalent provision to regulation 6(2)) must be given an autonomous meaning so as to have the same meaning throughout the EU, that the exemption should be construed narrowly or restrictively and that the purpose of regulation 6(2)(b) was to limit the exclusion to the essence of the price, just as the purpose of regulation 6(2)(a) was to limit it to the main subject matter of the contract.
The Court of Appeal then held that in applying that general approach to the question whether a particular term falls within regulation 6(2)(b), in that it forms part of the essential bargain, the court should consider the substance of the provision and the part that the term plays in the contract and whether it is directly to do with a payment that properly is within the expression, “the price or remuneration”. The Court of Appeal (at [90]) listed a number of considerations that are relevant to the broad question.
Typical consumer’s perspective
In the High Court, the Judge held that the perspective of the “typical consumer” is a useful guide as to whether a payment falls within regulation 6(2)(b). He explained that:
“it would, I think, be surprising if the court felt able to conclude that a payment is the price or remuneration within regulation 6(2)(b) even though a typical consumer would not recognise it as such when presented with the terms of the seller or supplier.”
The Court of Appeal agreed and held that although the position of the Banks is not to be ignored, yet given the importance which the travaux préparatoires attached to the lack of bargaining power of consumers, it is appropriate to have particular regard to the viewpoint of the typical consumer, rather than that of the Banks. Moreover, using the perspective of the typical consumer as a guide helps to achieve the purpose of ensuring that regulation 6(2) has a suitably restrictive approach in line with its purpose as identified above.
Charges: part of essential bargain?
Applying that restrictive approach, the Court of Appeal agreed with the Judge that those charges do not form part of the essential bargain and that therefore an assessment of the fairness of the charges is not excluded by regulation 6(2)(b). The Court of Appeal arrived at this conclusion for two main reasons. The first is that the relevant terms operate to impose the charges in contingent circumstances so that they are akin to default charges which are triggered by a breach of contract. Although they are not in fact triggered by a breach of contract, because of the manner in which the contractual relationship has been expressly framed by the banks, this does not mean that they are not contingent charges.
The second reason is that the relevant terms are not core terms because they are not specifically negotiated. Furthermore, it was also relevant that the charges, although referred to in the Banks’ leaflets, were not at the forefront of the Banks’ advertising.
Some differences
Although the Court of Appeal agreed with the conclusion of the Judge, there are a number of issues on which they differed. First, the Court of Appeal arrived at its conclusion on a broader basis than that adopted by the Judge. The Judge took the view that the provision of an unarranged overdraft is part of the “essential services” supplied by a bank operating current accounts. The Court of Appeal disagreed and said that the question is not what is an essential service but what is the core or essential bargain between the parties. The principal reasons which led the Court of Appeal to the conclusion that the charges were not part of the core or essential bargain were not that the banks did not render part of an essential service when a decision was made to debit an overdrawn account but rather they were that the charges (a) were contingent and (b) were not bargained for or in any real sense chosen by the customer.
Secondly, the Judge held that a bank’s consideration of a request or deemed request for an unarranged overdraft before deciding not to pay, which leads to a charge, is not a service because the real and essential service in a current account contract is that of paying on a customer’s instruction. The Court of Appeal arrived at a different conclusion. A bank’s consideration of the request was a service because the bank owed a contractual duty to do so. However, the Court of Appeal agreed with the view that although this is a service, it is an ancillary or incidental service.
Is compensation nigh?
Given the differences of opinion between the High Court and the Court of Appeal and in light of what is at stake for the Banks, it is not surprising that, although the Court of Appeal refused permission to appeal, the Banks lodged a petition for permission to appeal. On 31 March 2009 the House of Lords gave the Banks that permission. The date of the hearing has not yet been announced but it is expected that the appeal will be heard by the end of July 2009. Individual claims for refund against the Banks must therefore await the decision of the House of Lords.
Even if the OFT wins in the House of Lords there will be no immediate refunds. The OFT will proceed with the second stage of the process, to determine whether the terms are actually unfair. Therefore, in relation to the individual cases that are on hold in the county courts, the Court of Appeal has stated that, in its view, the status quo should remain until the determination of the appeal to the House of Lords and, if the decision of the Court of Appeal stands, until the OFT has carried out its assessment of fairness.
If the OFT decides that the charges are unfair there will be discussions with the Banks to determine the appropriate compensation for the individual complainants. If agreement is not reached on this issue the consequence may be further litigation to determine the quantum. So, although the Court of Appeal decision might have brought compensation for individual claimants a step closer, this is still some distance away. In the meantime, individual claimants may apply for the stay in respect of their claim to be lifted on the ground of financial hardship. However, as the failed attempt in Rutherford v. HSBC Bank plc [2009] EWHC 733 (QB) shows, the courts will not lift a stay lightly.
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