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12 May 2009
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By Fiona Blakeborough
Banks still have a chance, however slim, of winning the overdraft charges case in the Lords, but should they really be running the risk and legal expense of defending the claim this far, asks Fiona Blakeborough
The recent Court of Appeal decision on unfair bank charges in Abbey National and Ors v The Office of Fair Trading [2009] EWCA Civ 116 would suggest the battles are being won by consumers, but this does not mean that the banks have lost the war. Can the banks level the scoresheet in the House of Lords?
In April 2007, the OFT started a formal investigation into the fairness of personal current account charges. By July 2007, the OFT had issued a test case in the High Court against eight banks: Abbey National plc, Barclays Bank plc, Clydesdale Bank plc, HBOS plc, HSBC Bank Plc, Lloyds TSB Bank plc and Nationwide Building Society to determine whether the banks’ standard terms relating to charges for unauthorised overdrafts and returned items could be assessed for fairness under the Unfair Terms in Consumer Contracts Regulations 1999.
Certain terms are exempted from assessment by regulation 6(2), which provides that “Insofar as it is in plain 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.”
Service price or remuneration
The main issue was whether the terms related to the price or remuneration for services, so that the standard terms would fall within the regulation 6(2) exemption. The court considered the nature of the charges in detail, including whether the “typical consumer” would regard the charges as the price for e.g. exceeding an agreed overdraft, or an item being returned unpaid.
The court concluded that, where services were provided, the charges did not form the price or remuneration for those services. Accordingly, the charges could be assessed for fairness under the regulations.
While the judgment was based on complex legal issues, the result makes sense. Why should the banks be permitted to charge consumers potentially arbitrary fees without any justification? What was perhaps more surprising to the “typical consumer” was that the court determined, relatively quickly, that the charges were not penalties and were not therefore unenforceable (and therefore recoverable in their entirety) per se.
With overdraft charges accounting for around £2.56bn per year revenue for the banks in 2006, and the cost of reimbursing consumers likely to exceed £1bn, somewhat predictably, the banks moved quickly to appeal.
The OFT did not appeal the decision on penalties. On the assessment issue, the court adopted a broader approach than the High Court, looking at the purpose of the European directive to which the regulations give effect, the working documents for the directive, case law and academic writings. The question for the Court of Appeal was whether the charges formed part of the essential bargain between the customer and the banks.
The court concluded that they did not. The fact that the terms were not specifically negotiated and that the charges were contingent and not at the forefront of the banks’ advertising were strong indications that they were not core provisions. Accordingly, assessment of fairness was not precluded by regulation 6(2), and the appeal was dismissed.
Essential bargain
The thousands of cases issued by consumers and currently on hold in county courts around the country are to remain that way pending the appeal to the House of Lords. However, the High Court’s decision on penalties stands, which will leave consumers litigating charges on this basis alone is some difficulties, and at risk on costs.
As to the merits of the further appeal, the Court of Appeal acknowledged that the banks’ submissions on the essential bargain issue had ‘undoubted force’. Even as a consumer it is difficult not to have some sympathy with the banks. Can it truly be said that the charges are not part of the essential bargain for those customers whose accounts are generally in debit? It is easy to forget that the root of this litigation lies in consumers continuing to spend money that is not theirs to spend.
Nevertheless, under the scrutiny of the High Court and Court of Appeal, the legal case for assessment is convincing. Continuing to pursue exclusion based on technical arguments implies that the banks are far from certain of their position on fairness, which will fall to be determined in future litigation if necessary. Early indications from the OFT are that the charges will be found to be unfair and it will be interesting to see how, if at all, the banks propose to justify charging £38 for exceeding an agreed overdraft, potentially by a few pence.
This surely should now be the main focus for the banks. While the public may have been content for the banks to challenge the High Court’s decision to this stage, investing further significant funds in legal fees to argue, probably unsuccessfully, against consumers trying to cope with recession in the face of very public losses for many of the banks involved can only result in outcry, and further loss of confidence in financial institutions.
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Main Page Content:
By Fiona Blakeborough
Banks still have a chance, however slim, of winning the overdraft charges case in the Lords, but should they really be running the risk and legal expense of defending the claim this far, asks Fiona Blakeborough
The recent Court of Appeal decision on unfair bank charges in Abbey National and Ors v The Office of Fair Trading [2009] EWCA Civ 116 would suggest the battles are being won by consumers, but this does not mean that the banks have lost the war. Can the banks level the scoresheet in the House of Lords?
In April 2007, the OFT started a formal investigation into the fairness of personal current account charges. By July 2007, the OFT had issued a test case in the High Court against eight banks: Abbey National plc, Barclays Bank plc, Clydesdale Bank plc, HBOS plc, HSBC Bank Plc, Lloyds TSB Bank plc and Nationwide Building Society to determine whether the banks’ standard terms relating to charges for unauthorised overdrafts and returned items could be assessed for fairness under the Unfair Terms in Consumer Contracts Regulations 1999.
Certain terms are exempted from assessment by regulation 6(2), which provides that “Insofar as it is in plain 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.”
Service price or remuneration
The main issue was whether the terms related to the price or remuneration for services, so that the standard terms would fall within the regulation 6(2) exemption. The court considered the nature of the charges in detail, including whether the “typical consumer” would regard the charges as the price for e.g. exceeding an agreed overdraft, or an item being returned unpaid.
The court concluded that, where services were provided, the charges did not form the price or remuneration for those services. Accordingly, the charges could be assessed for fairness under the regulations.
While the judgment was based on complex legal issues, the result makes sense. Why should the banks be permitted to charge consumers potentially arbitrary fees without any justification? What was perhaps more surprising to the “typical consumer” was that the court determined, relatively quickly, that the charges were not penalties and were not therefore unenforceable (and therefore recoverable in their entirety) per se.
With overdraft charges accounting for around £2.56bn per year revenue for the banks in 2006, and the cost of reimbursing consumers likely to exceed £1bn, somewhat predictably, the banks moved quickly to appeal.
The OFT did not appeal the decision on penalties. On the assessment issue, the court adopted a broader approach than the High Court, looking at the purpose of the European directive to which the regulations give effect, the working documents for the directive, case law and academic writings. The question for the Court of Appeal was whether the charges formed part of the essential bargain between the customer and the banks.
The court concluded that they did not. The fact that the terms were not specifically negotiated and that the charges were contingent and not at the forefront of the banks’ advertising were strong indications that they were not core provisions. Accordingly, assessment of fairness was not precluded by regulation 6(2), and the appeal was dismissed.
Essential bargain
The thousands of cases issued by consumers and currently on hold in county courts around the country are to remain that way pending the appeal to the House of Lords. However, the High Court’s decision on penalties stands, which will leave consumers litigating charges on this basis alone is some difficulties, and at risk on costs.
As to the merits of the further appeal, the Court of Appeal acknowledged that the banks’ submissions on the essential bargain issue had ‘undoubted force’. Even as a consumer it is difficult not to have some sympathy with the banks. Can it truly be said that the charges are not part of the essential bargain for those customers whose accounts are generally in debit? It is easy to forget that the root of this litigation lies in consumers continuing to spend money that is not theirs to spend.
Nevertheless, under the scrutiny of the High Court and Court of Appeal, the legal case for assessment is convincing. Continuing to pursue exclusion based on technical arguments implies that the banks are far from certain of their position on fairness, which will fall to be determined in future litigation if necessary. Early indications from the OFT are that the charges will be found to be unfair and it will be interesting to see how, if at all, the banks propose to justify charging £38 for exceeding an agreed overdraft, potentially by a few pence.
This surely should now be the main focus for the banks. While the public may have been content for the banks to challenge the High Court’s decision to this stage, investing further significant funds in legal fees to argue, probably unsuccessfully, against consumers trying to cope with recession in the face of very public losses for many of the banks involved can only result in outcry, and further loss of confidence in financial institutions.
