Publications - Commercial Litigation & Dispute Resolution - Scotland
June 2008
Bank Charges - Test Case Charges On
by Stuart McNeill
In April this year judgment was handed down in the eagerly awaited test case brought by the OFT against the UK's leading High Street Banks seeking a ruling on the fairness of their overdraft charges. The Banks asked the OFT to bring the test case, partly to limit the huge number of cases that were being taken by aggrieved customers in County Courts all over the UK – which were stayed pending the decision. Although the press coverage suggests that the OFT was successful, this is only part of the story.
The issues
The test case sought a ruling on whether the charges were (1) caught by the Unfair Terms in Consumer Contracts Regulations 1999 (the "1999 Regulations") and (2) whether they were unenforceable at common law as a penalty.
If applicable, the 1999 Regulations provide that 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". Importantly, however, the fairness assessment is not applicable to terms in plain English regarding the "definition of the main subject matter of the contract" or the adequacy of the price or remuneration, as against the goods or services supplied in exchange", potentially catching the fees for unauthorised overdrafts.
The importance of the penalties argument meanwhile is that charges found to be a penalty are completely unenforceable and so consumers can claim such charges going back 6 years. For a payment provision to be penal it must provide for payment upon a breach of contract (Export Credits Guarantee Department v Universal Oil Products Co) that is not a genuine pre-estimate of loss flowing from the breach but which is "extravagant and unconscionable" in amount in comparison with the prospective loss (Jeancharm Ltd v Barnet Football Club Ltd).
The decision
The judge held:
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There was no case at common law for the charges to be penalties.
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The Banks' terms now in use were, to a greater or lesser extent, in plain English.
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When Banks decline to pay a payment request they do not provide a service.
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When Banks give an unauthorised overdraft they do provide a service
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The charge applied by Banks for an unauthorised overdraft is not "the price or remuneration" for the service within Regulation 6(2)(b) and so automatically exempt from any consideration of fairness.
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The Banks failed in their argument that the charges were part of the "whole package" for services i.e. the "definition of the main subject matter of the contract"
What now?
It is a mixed bag for the Banks. The majority of the cases brought in the courts are based on the charges being penalties, an allegation the Banks won on. The Banks however will want to close off the possible application of the 1999 Regulations and have now been given leave to appeal against the decision. Should it be ultimately decided, looking at each set of applicable terms that they are unfair under the 1999 Regulations, the Banks each face the potential for significant litigation into the future by not only individuals acting for themselves, but potentially in the larger cases (claims exceeding £5,000) by class action specialists. With most Banks providing in their accounts for claims in the 10s of millions and legal fees in the test case, even with legal fees in the region of £2-3 million for each Bank, deciding to fight on is by far the cheapest option.
There are however signs that the Banks are looking at options other than litigation, at least looking forward. Only this week Barclays broke ranks and decided to cap its overdraft fees at £8 (plus interest) and has offered customers some relief from multiple charges with a "buffer zone" facility that can be used for up to 5 days. It seems certain that other Banks will follow and while the customer may seem to be the winner in the short term, the Banks will be looking to recoup these charges elsewhere. Some Banks may be chasing harder than other, especially with the results of the OFT Payment Protection in loans investigation expected this summer, a market in which Lloyds TSB and Barclays have a 25% share between them.
Stuart McNeill, Senior Associate, Dispute Resolution
Contact stuart.mcneill@mcgrigors.com
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