Overdraft charges face further scrutiny

Banks’ terms and conditions which impose charges on customers for unauthorised overdrafts are subject to the test of fairness in the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR 1999), the High Court has ruled.

In Office of Fair Trading v Abbey National plc and 7 Others, Mr Justice Andrew Smith accepted the banks’ submissions that none of the relevant terms in the contracts imposing these charges amounted to a penalty under common law.

Ian Weatherall, a partner at Wragge & Co, explains that 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.

“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,” he says.

“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.”

Although this decision on preliminary issues did not amount to a finding that the charges are not fair, it means the Office of Fair Trading (OFT) is entitled to continue its investigations into whether the charges under UTCCR 1999 are unfair and, if so, what a fair fee should be.

The seven banks and one building society—which challenged the OFT’s power to decide whether it was unfair to charge customers up to £39 for exceeding overdrafts—are expected to appeal, meaning the cases of thousands of claimants will be delayed further. Weatherall says: “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.”

Thousands of customers have tried since 2006 to recoup the money paid out in allegedly unfair and excessive charges. UK banks have already paid an estimated £784m in out-of-court settlements but last July the Financial Services Authority allowed the banks to suspend refunds until the test case is finished.

Citizens Advice director of policy Teresa Perchard says it would be in all consumers’ best interests for both sides to come to an agreement instead of letting the case drag on through the courts. However, an OFT spokesperson says: “We are continuing our investigation into the fairness of these terms and will consider our position after reviewing the detail of this judgment.”