Over the past two years, thousands of individuals have brought actions against lenders in an attempt to recover overdraft charges levied against them. In most cases, the banks have settled without admitting any liability; an approach that reportedly saw them hand back in the region of £800m to customers in 2007 alone. In July 2007 the OFT, following its market study into pricing among retail banks, commenced proceedings in the High Court for a judicial declaration on a key legal principle. The banks’ view was that the unfairness rules in UTCCR could not be used to challenge the fairness or otherwise of unauthorised overdraft charges. The OFT considered that they did and decided that clarification by the Courts was necessary.
Seven of the UK’s largest banks (Abbey National, Barclays, Clydesdale, HBOS, HSBC, Lloyds TSB, RBS) and the Nationwide Building Society (who, together, account for about 90% of personal current accounts in the UK) agreed to a test case. County Courts were told that they should temporarily halt any current or pending cases brought by individual consumers challenging the fairness of the charges until a High Court ruling was handed down. The FSA also agreed to waive its requirement that firms must respond to complaints within a prescribed timeframe (the waivers are currently due to expire in July) and the Financial Ombudsman Service put individual complaints about bank charges on hold pending the outcome of the test case.
Following the judgment, tens of thousands of County Court cases are likely to remain on hold for the time being, delaying for now the prospect of banks having to act where customers seek to revive their claims and ask for summary judgment in their favour should their banks not respond. The Financial Ombudsman Service announced last week that it will continue to refrain from pursuing relevant complaints at least until it is clear whether any aspects of the judgment will be appealed.
While the final outcome for banks remains uncertain at present, it is clear that last week’s judgment could have significant ramifications for the future of high street banking. With so much at stake, an appeal by the banks is highly likely, and it is quite possible that this case will go all the way to the House of Lords.
Three sets of issues were considered during the hearing:
1. Whether Regulation 6(2) of UTCCR applies to the charges, therefore exempting them from an assessment of fairness.
Regulation 6(2) provides that, in so far as it is in “plain intelligible language”, no term may be assessed for fairness in relation to the “adequacy of the price or remuneration, as against the goods or services supplied in exchange”. Such terms are considered “core terms”. Accordingly, an assessment for fairness, including an assessment carried out by the OFT, can only be made in relation to certain contractual provisions within consumer contracts, but this entitlement does not extend to terms relating to fees for a service which are deemed to be core terms of a contract.
The OFT submitted that providing an unarranged overdraft does not form a key part of the current account service and, therefore, is not a core term relating to price adequacy and therefore was not exempt from an assessment of fairness. The banks, in turn, sought to show that the provision of an overdraft facility is a fundamental part of the pricing of a current account and therefore a core term and exempt from a fairness assessment. By way of example, Laurence Rabinowitz QC (for RBS) confirmed that the average RBS customer became overdrawn in excess of any agreed overdraft limit on three occasions in 2007. The banks submitted that unarranged credit is central to modern, everyday banking. Geoffrey Vos QC (for Nationwide) told the Court that customers across the country draw on their unauthorised overdrafts to the tune of £600m a day. The banks argued that, by honouring a payment where the account holder’s balance or authorised overdraft does not cover that sum, the bank is responding to a request for an extension of credit by its customer. They argued that this is a service and constitutes a core part of the package of services provided to the customer and thereby exempt from Regulation 6(2)
The banks further submitted that the terms were worded in plain, intelligible language, contrary to the OFT’s claims that they were “unascertainable to the typical customer”. Mr Robin Dicker QC, for HBOS, argued that bank contracts were obliged simply to avoid being obscure or ambiguous.
2. The meaning and effect of Regulation 5(1), and specifically the meaning of the provision about “the requirement of good faith”.
Regulation 5(1) provides that a term which is not individually negotiated will be considered 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”. The banks sought declarations as to the effect of this wording. This issue was not addressed in the judgment following a request by the banks made during the hearing for further time to consider their position.
3. The common law relating to penalties.
If the charges are deemed to be penalties then they are unenforceable at common law. In order for the provision for payment to be penal, it must provide for payment as a result of a breach of contract that is not a genuine pre-estimate of loss but which is extravagant and unconscionable in amount in comparison with the prospective loss.
The OFT submitted that some of the banks’ terms were capable of imposing contractual obligations or prohibitions on customers (for example, ensuring they have sufficient funds in their current account to cover any cheques they have written) and so of giving rise to penalties. The banks submitted that the OFT’s claim was incorrect because none of the terms identified by the OFT imposed a contractual commitment such that the charges were penalties for breach of that commitment. They further argued that, where UTCCR applies, it supplants and displaces the common law doctrine on penalties.
Summary of Decision
The key findings made by Mr Justice Andrew Smith are as follows:
1. Mr Justice Andrew Smith found that the terms are not protected from an assessment as to fairness under UTCCR and, accordingly, the OFT was entitled to consider the fairness of the charges. Regulation 6(2) prohibits assessment of fairness of the balance of the essential bargain between a seller or supplier and a consumer. The balance between a bank and its customer is between the entire package of services the bank provides and the total benefits it gains from operating the current account. The total benefits to a bank do not consist solely of the charges with which this case is concerned, but also a bank’s ability to use a customer’s funds when his account is in credit, and to charge interest when the account is in debit. An OFT investigation assessing the fairness of merely the charges is very different from an assessment of the overall “adequacy” of the entirety of the benefits the banks receive in exchange for the full package of services.
Regulation 6(2)(a) is concerned with the language used in contractual terms, and therefore with whether the consumer will understand the meaning of express terms rather than what terms will be implied into the contract. The wording used in contractual terms must be sufficiently comprehensible to the typical consumer to allow them to understand how the terms affect the rights and obligations of both parties under the contract. The regulation therefore does not exclude an assessment of fairness unless the typical consumer is likely to understand not simply the actual wording in the contract but, also, its effect.
Mr Justice Andrew Smith considered that the terms used by the banks are in plain intelligible language, with a few specific and minor exceptions. Mr Justice Andrew Smith considered it unnecessary to say anything about the implications of this, as he had found that the terms fell outside the exemption in Regulation 6(2) in any event.
2. The purpose of the hearing was to deal with the preliminary issue as to whether the terms could be challenged as potentially unfair, rather than whether they were, in fact, unfair. Mr Justice Andrew Smith declined to make any declarations concerning the requirement of good faith, considering it inappropriate to do so since the parties had not made full submissions on the point at the hearing. The important point to note is that his decision does not, therefore, make any conclusions as to the fairness or otherwise of the charge.
3. On the separate issue of whether the charges were penalties for breach of a contractual commitment and therefore unenforceable at common law, the Court found in the banks’ favour. None of the terms identified by the OFT stated that the actions which lead to charges being levied were breaches of contract, and so the charges could not be considered to be sums payable as compensation for those breaches. However, the banks’ submission that UTCCR displaces the common law rules against penalties was rejected.
The judgment is just the first step in a lengthy process that will eventually determine just how costly these claims will be to the banking industry. The judgment, if not overturned on appeal, opens the way for the OFT to investigate the banks’ charges and determine whether they are unfair. As has happened with credit card charges, the OFT could effectively cap future charges and the banks could be forced to refund any difference between the level of this cap and any charges levied by them in the previous 6 years. The banks’ liability is likely to run into the billions.
Looking forward, banks will have lost a valuable source of profits. Banks will be considering whether it will be necessary to supplement their income by introducing a fee structure, whereby customers will be charged for services such as using ATMs and cashing cheques or perhaps even charge an annual fee for the maintenance of current accounts. While this could be an attractive new source of revenue, the question will be whether a bank could charge for current account services and not lose customers in a competitive banking market. It may be that the cost might be picked up by SMEs who benefit neither from the protection of UTCCR nor the financial weight to individually negotiate the fees and terms for their banking arrangements.