High Court ruling on bank charges

Judgment in the highly publicised 'test case' between the Office of Fair Trading (OFT) and seven leading high street banks and one building society was handed down on Thursday 24 April 2008. The claim had been issued by the OFT to determine first, whether unauthorised overdraft charges imposed on personal current bank accounts amounted to penalty charges; and second, whether such charges could be subject to the fairness test imposed by the Unfair Terms in Consumer Contract Regulations 1999.

Penalty Charges

In order for a contractual payment provision to amount to a penalty, it must provide for payment upon breach of contract which is 'extravagant and unconscionable in amount' when compared with the prospective loss. The OFT identified various provisions within the banks' individual terms and conditions which it alleged made reference to a charge for a breach of contract. However, in reviewing the terms and conditions, the Court found that none of the contractual provisions meant that customers were under a contractual commitment, such that the bank charges imposed could amount to a penalty for breach of the commitment.

This is a welcome result for the banks as it prevents even more floodgate litigation. A penalty clause finding would have removed the time limitation constraints for customers in issuing proceedings.

The Regulations

The Regulations allow the OFT on behalf of consumers to challenge clauses in contracts on the grounds that they are "unfair". However, the Regulations will not apply to elements of a contract which are deemed to be a "core provision", i.e. relating to either the main subject matter of the contract or to the adequacy of the price or remuneration as against the goods or services sold or supplied. The principle behind this is that a consumer should not complain simply because he has made a bad bargain.

The banks argued that Regulation 6(2) applied to their terms on the basis that the bank charges amounted to the price or remuneration for the banking services being supplied on the following grounds. First, on the basis that current account holders are provided with a 'bundle' or 'package' of services which in total allow them to manage their day-to-day finances, to include the provision of an unauthorised overdraft, and to which the bank charges are the price or remuneration for that bundle of services; or second, because those charges amount to the price or remuneration of specific services supplied, being the specific service of allowing borrowing requests where no facility has been agreed in advance.

The OFT argued that Regulation 6(2) could not apply to bank charges as they do not relate to the main subject matter of the contract, and, in any event, Regulation 6(2) does not apply to every payment made under a contract, but only to those which can properly be seen as price or remuneration for which goods or services are supplied in exchange.

It was found that where a bank declines to pay an amount upon instruction (for example, a 'bounced' direct debit payment or cheque), the customer will receive no actual benefit from the bank considering and declining that request for payment and therefore there can be no question of a service having been supplied.

The Court therefore concluded that bank charges are not exempt from an assessment of fairness under the Regulations as those charges did not amount to a core provision. As a consequence of the Court's finding, bank charge provisions are not exempt from an OFT assessment of fairness.

Impact and Next Steps

No decision as to the fairness or otherwise of the bank charges themselves was made: this is something for the OFT to investigate. The judgment simply relates to whether bank charges can actually be subject to an assessment of fairness.

A further directions hearing is listed at the end of May to allow a timetable for the next steps to be set. However, the banks have already indicated their intention to appeal the decision.

County Court Cases

Currently, the thousands of County Court claims that have been issued by individual customers are on hold pending this decision. Mr Justice Andrew Smith indicated that he saw no reason for those claims to restart, certainly until the May hearing, but more generally until the resolution of any appeal. However, the management of those claims remains with the individual County Courts and the ultimate decision as to the progress of individual cases will therefore remain with the District Judges hearing the cases. At the time of writing, the County Courts have adopted a pragmatic approach to the litigation, and allowed those cases to remain subject to the test case decision, and there is no reason to suspect that this sensible attitude will not continue until there has been a final determination of any appeal launched.