Bashing the banks?

The Office of Fair Trading v Abbey National Plc and 7 Others [2008] EWHC 875 (Comm)

The much-anticipated decision of the High Court in the landmark test case taken by the Office of Fair Trading (OFT) against Britain's biggest banks was released on 24 April.



The OFT brought proceedings against the banks to determine whether or not it had power to rule that current account bank charges were unfair under the Unfair Terms in Consumer Contracts Regulations 1999. As part of the proceedings, the banks asked the court to consider whether or not the charges levied by the banks constituted penalties, which would be unenforceable at common law.



The court decided that the OFT did have the power to rule whether charges were unfair under the regulations, however it also ruled that none of the banks' charges could be regarded as penalties.



So what does the judgment actually mean in practical terms? Is this the end of the road for bank charges or the end of free banking?





Investigation

In April 2006, the OFT published its report on default charges in credit card contracts. The OFT's decision was that the charges common in the industry were likely to constitute penalties at common law, and furthermore would be unfair under the 1999 regulations. In September 2006 the OFT reported that, while disagreeing with the principles set out in the report, credit card issuers had agreed to reduce their default charges, in the majority of cases almost by half.



The OFT began a formal investigation into the fairness of charges for unauthorised overdrafts and returned items in April 2007. The banks contended that the charges were excluded from consideration of fairness under the 1999 regulations. It was agreed that litigation was required to clarify the area generally and, accordingly, on 27 July 2007 the OFT issued proceedings against eight banks: Abbey National Plc, Barclays Bank Plc, Clydesdale Bank Plc, HBOS Plc, HSBC Bank Plc, Lloyds TSB Bank Plc, Royal Bank of Scotland Group Plc and Nationwide Building Society.





Proceedings

The claim involved consideration of the banks' standard terms ('relevant terms') imposing charges ('relevant charges') when customers instruct a bank to make payment but have insufficient funds in their account, or where customers overdraw on accounts without an overdraft facility or in excess of an existing facility. In the former case, the banks may choose to honour or dishonour the instruction, or are forced to make payment, for example on a cheque supported by a cheque-guarantee card.



Regulation 5(1) of the 1999 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 significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer.'



However, certain terms are exempted by regulation 6(2), which provides: 'in so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate to the definition of the main subject matter of the contract, or to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.'



The OFT sought a declaration that the relevant terms were not excluded from assessment by regulation 6(2). The banks counterclaimed for a declaration to the contrary, and also sought declarations that the relevant charges were not penalties at common law. If the relevant terms were not excluded from assessment of fairness, the banks sought three declarations in relation to the requirement of good faith in regulation 5(1).



Determination as to whether the relevant terms were in 'plain intelligible language' accounted for the bulk of the judgment. The court held that four of the banks' terms were in plain intelligible language and those of the remaining four were in plain intelligible language except in minor aspects.



The court then considered whether the relevant charges could amount to penalties at common law. The court concluded fairly quickly that none of the provisions identified by the OFT meant that the customer was under a contractual commitment so that the relevant charges could constitute a penalty for breach.



Next, the court had to determine whether regulation 6(2) excluded assessment of the relevant terms. The banks' case was that the relevant charges were the price or remuneration, either for the package of services provided to customers to manage their day-to-day finances, or alternatively for specific services provided to customers. The court held that, when a bank processed, but did not pay upon an instruction from a customer holding insufficient funds, no service was provided. However, when a bank did pay on such an instruction, including providing an unarranged overdraft, then a service was provided. However, the court rejected the banks' argument that the relevant charges formed the price or remuneration in exchange for that service, and accordingly the relevant terms were not excluded from assessment under the regulations.



Finally, the court considered the requirement of good faith. The court declined to grant any of the declarations sought by the banks, but the important issue of the date at which an assessment of fairness should be made, taking account of the fact that contracts may have been varied, or revised terms sought to be introduced, has been left open for full consideration at a later stage.





Conclusion

Essentially, the judgment means that the OFT can determine whether or not it considers current account charges to be fair. However, given the court's decision on penalties, this will not be as straightforward as the position in relation to credit card default charges. It seems unlikely that the banks will agree to simply reduce charges overall, and the OFT will have to issue further proceedings to determine fairness if agreement cannot be reached. It is clear from the court's decision that the ambit of 'good faith' for the purposes of regulation 5(1) is likely to present further difficulties, which may need to be determined as a further preliminary issue before any action on fairness.



Given its significance to the banking industry, the banks last week appealed the decision. The judgment involved detailed consideration of complex issues of law and, although the banks may have lost the first argument under the regulations, this can be no guarantee as to the final result.



For practitioners, therefore, the practical effect of the judgment is very small, save that any consumers who are bringing and defending cases against banks on the basis that charges are penalties alone may be in for a nasty shock. Public opinion seems to be divided as to whether the judgment represents a victory for the poorer consumer, or the beginning of the end for free banking for the more wealthy, who are unlikely to incur account charges in any event. Competition within the financial market is fierce, and it seems doubtful that the public's reaction to the introduction of day-to-day charges would be any less than the furore over the introduction of cashpoint fees a few years ago, which resulted in the majority of such fees being scrapped.



In context, the score sheet may well not be as clear-cut as the judgment implies.

By Fiona Blakeborough, Weightmans, Liverpool