Watch this space
Date: 11 December 2009
Authors: Andrew Head
Issue: Vol 159, Issue 7397
Categories: Opinion, Commercial, Banking
The Supreme Court decision of 25 November on bank charges in Office of Fair Trading v Abbey National plc and others is on the face of it surprising. It appears to run counter to political and consumer trends.
It is also striking that the Supreme Court reversed not only the first instance judgement but the unanimous decision of the Court of Appeal. There has been a predictable howl of anguish from consumer groups. But is the Supreme Court the villain of the piece or should we point the finger elsewhere? And how does the decision leave the thousands of claimants whose cases have been stayed pending the outcome?
The Supreme Court judgment was the end of a process which started in 2007 with the Office of Fair Trading (OFT) investigating the fairness of terms relating to overdraft charges. The OFT also commenced a study into competition and value for money in the provision of personal current accounts with particular scrutiny of the low levels of cost transparency and the ease with which consumers could switch accounts.
The banks raised objections based on the application of reg 6(2) of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRS) (SI 1999/2083). The issue before the Supreme Court was therefore not the fairness of the banks’ charges. It was a much narrower point: whether as a matter of law and fairness the bank charges levied on personal current accounts in respect of unauthorised overdrafts could be challenged by the OFT as excessive in relation to the service supplied.
This involved consideration by the court of regs 5(1) and 6(2).
Regulation 5(1) states: “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.”
Regulation 6(2) states: “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.”
The consequences of a contractual term being found to be unfair are that the term is not binding on the consumer and the contract will only continue to bind the parties if it is capable of continuing in existence without the unfair term.
Assessment
The OFT argued that bank charges were capable of being assessed for fairness and reg 6(2)(b) did not apply to them because bank charges did not form part of the bargain between the parties but were ancillary. The banks argued that the OFT and the lower courts had adopted an over-complicated approach and had misread reg 6(2) as being concerned only with what was an essential part of the bargain between banks and consumers. Bank charges levied for unauthorised overdrafts constituted part of the remuneration for banking services provided and therefore fell within reg 6(2).
After an exhaustive examination of the regulations the Supreme Court agreed with the banks and concluded that the OFT could not challenge such charges.
A Parliamentary matter
No doubt mindful of the sensitive nature of the judgment, the Supreme Court made it clear that it was not dealing with the fairness of the bank charges themselves. It also highlighted the fact that this was an issue for Parliament to decide.
Leaving no doubt as to where he thought responsibility lay, Lord Walker stated that: “Ministers and Parliament may wish to consider the matter further. They decided in an era of ‘light-touch’ regulation to transpose the Directive as it stood rather than to confer the higher degree of consumer protection afforded by the national laws of some other member states. Parliament may wish to consider whether to revisit that decision.”
Lifeline
Lord Phillips also threw a potential lifeline to the OFT and to the thousands of consumers threatened with having their claims struck out. He stated that the terms and conditions of the banks (as opposed to the charges levied by them) may be open to challenge under UTCCRS, Art 5(1) if it was determined that it was unfair to subsidise some customers as a result of the level of charges levied on others who incurred unauthorised overdrafts. Whether the OFT has any appetite to re-open the issue must be open to doubt. Consumer groups are, however, already altering their template letters to take account of this obiter remark in an attempt to stop banks striking out their claims.
Resolution
The issues raised by the OFT are important. Is it fair for banks to make substantial profits out of charges imposed on customers who incur unauthorised overdrafts, effectively cross-subsidising customers who remain in credit? The Supreme Court has made its position clear. This matter can now only be resolved by dialogue between the government, the OFT and FSA or, failing agreement, by primary legislation.
Andrew Head is head of commercial litigation at Forsters LLP
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