Don’t bank on it
Date: 11 December 2009
Authors: Freya Law
Issue: Vol 159, Issue 7397
Categories: Features, Commercial, Banking
The Supreme Court overruled the High Court and the Court of Appeal in The Office of Fair Trading v Abbey National plc & Others [2009] UKSC 6, [2009] All ER (D) 271 (Nov) in a unanimous judgment last month.
The question before the court was whether the Office of Fair Trading (OFT) was permitted to investigate the fairness of bank charges levied for unauthorised overdrafts and other related charges under reg 6(2) of the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/ 2083) (the regulations).
The Supreme Court (Lord Phillips, Lord Walker, Lady Hale, Lord Mance and Lord Neuberger MR) considered the correct interpretation of reg 6(2) and decided the OFT was not so permitted.
The appellants, representing 90% of UK personal current accounts, comprised seven banks (Abbey National, Barclays Bank, Clydesdale Bank, HBOS, HSBC, Lloyds TSB, and Royal Bank of Scotland) and one building society, (Nationwide) (the Banks). The ruling will come as a shock to the OFT and consumers but as a relief to the banking community, not least because such charges generate an estimated annual revenue of £3.5bn.
UK banks deploy a “free-if-in-credit” mode of charging for their personal current accounts so that customers do not pay a fee, but charges and interest may be imposed if the account falls into debit.
Public concern
Public concern about bank charges prompted thousands of consumers to issue claims in the county courts for refunds of charges imposed and to lodge complaints with the Financial Ombudsman Service. In 2008, the OFT brought a test case, pursuant to an agreement with the Banks and the Financial Services Authority (FSA), to establish whether it was entitled to assess the fairness of such charges under the regulations. All or virtually all of these county court claims have been stayed pending the outcome of the successive appeals.
The regulations were made to transpose into national law Council Directive 93/13/EEC on unfair terms in consumer contracts (the Directive). Regulation 5(1) of the regulations provides 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 to the detriment of the consumer.
The OFT has powers to assess “fairness”, subject to limits set out in the regulations. Reg 5(1) is circumscribed by reg 6(2) which provides:
“In so far 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.”
This has the practical effect of disallowing “value for money” arguments in the consideration of fairness. In this context, the court reviewed the following “Relevant Charges”—unpaid item charges, paid item charges, overdraft excess charges and guaranteed paid item charges—levied by the Banks either where there are insufficient funds in an account or where a payment is not covered by an arranged facility.
Key issue
Lord Phillips summarised the key issue, which he emphasised was a narrow one, before the Supreme Court at para 57 as “whether the Relevant Charges constitute ‘the price or remuneration, as against the services supplied in exchange’ within the meaning of the Regulation. If they do not, the attack on the fairness of the terms that is open to the OFT will not be circumscribed by reg 6(2)(b). If they do, they will still be open to attack by the OFT on the ground that they are ‘unfair’ as defined by reg 5(1), but that attack cannot be founded on an allegation that the Relevant Charges are excessive by comparison with the services which they purchase, for that is forbidden by reg 6(2)(b)”.
At first instance, Andrew Smith J ruled ([2008] EWHC 875 (Comm)) that the Banks’ standard terms were largely in plain intelligible language and did not amount to common law penalties; and that it was inappropriate to give any declarations relating to “good faith” under reg 5(1). He also ruled that the relevant charges were not exempted from an assessment of fairness since they were not levied in exchange for services per se but for services provided in specific circumstances.
Further, the relevant charges were a part only of the Banks’ remuneration for their package of services. Hence, a fairness assessment of the relevant charges would not entail assessing the adequacy of the entire contract and so reg 6(2) did not bite. The OFT could assess the relevant charges. The Banks appealed.
The Court of Appeal (Sir Anthony Clarke MR, Lord Justice Waller V-P and Lord Justice Lloyd) dismissed the appeal ([2009] EWCA Civ 116). Adopting a broader approach, the court held that it was unrealistic to view each charge as a payment imposed for each separate service—the contract ought to be viewed as a global package of services.
The court held that reg 6(2) only applied to exempt from assessment of fairness the “core or essential bargain” of the package—to which a consumer would have regard in deciding whether to accept the bargain—but did not exempt “incidental or ancillary” terms—to which a consumer would not pay heed. The court concluded that the relevant charges were “ancillary” terms and could be assessed for fairness.
The Supreme Court overruled both the High Court and the Court of Appeal judgments. It decided that there was no indication that reg 6(2) is only concerned with the price for a core or essential service; any price payable would fall within reg 6(2)(b); and so, even on a restrictive interpretation, the relevant charges are clearly part of the price or remuneration for the global package of banking services.
The fact that the majority of customers do not incur such charges or that they are only payable in certain circumstances is irrelevant.
The court ruled that the OFT is unable to assess the adequacy of the price or remuneration, as against the value of the goods or services supplied in exchange, under reg 6(2)(b), in so far as the terms creating the relevant charges are in plain intelligible language.
The court clearly found it difficult to see how the relevant charges could not form part of the price of the Banks’ services when they account for a significant percentage of their revenue. Lord Phillips stated at para 88: “The Banks now rely on the Relevant Charges as an important part of the revenue that they generate from the current account services. If they did not receive the Relevant Charges they would not be able profitably to provide current account services to their customers in credit without making a charge to augment the value of the use of their funds.”
Lord Walker stated at para 47: “Charges for unauthorised overdrafts are monetary consideration for the package of banking services supplied to personal current account customers…I do not see how [the Court of Appeal] could have come to the conclusion that charges amounting to over 30% of the revenue stream were (para 111) ‘not part of the core or essential bargain’.”
Lady Hale, at para 93, aptly stated: “The banks may not be the most popular institutions in the country at present, but that does not mean that their methods of charging for retail banking services are necessarily unfair when viewed as a whole.”
The Supreme Court did not have to address the question of fairness and left open the OFT’s other options. Lord Walker at para 52 ventured: “this decision is not the end of the matter…Ministers and Parliament may wish to consider the matter further.” The UK had faithfully transposed the Directive but, unlike some member states, decided not to enact more far-reaching legislation which afforded greater consumer protection. Lord Walker thought that Parliament may decide to revisit that decision.
The OFT has advised that it will now consider the detail of the judgment before it decides whether to continue its investigation into unauthorised overdraft charges. The OFT is expected to make a further announcement later this month and, in the meantime, is seeking discussions with banks, consumer organisations, the FSA and government.
Highly charged
Although the OFT will not be able to attack the relevant charges by alleging that they are excessive compared to the services supplied, the OFT may use other measures which might include a review of the relevant charges under other provisions in the regulations. Alternatively, the personal current account market could be referred to the Competition Commission for a detailed market investigation (as Lady Hale questioned at para 93: “Is the real problem that we do not have a real choice because the suppliers all offer much the same product and do not compete on some of their terms?”).
If the fairness of bank charges is successfully attacked, however, this could herald the end of the “free-if-in-credit” model and banks may start to charge for the operation of personal current accounts. One way or another, as several of the Supreme Court justices indicated, this is unlikely to be the end of this highly charged issue.
Freya Law is a solicitor in the dispute resolution department of Field Fisher Waterhouse LLP and can be contacted at freya.law@ffw.com
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