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Three issues key to bank charges test case

13 June 2008

On 24 April 2008, the now celebrated test case on charges made by banks and building societies for unauthorised overdrafts was taken to the High Court by the Office of Fair Trading (OFT), seven UK banks and a building society.

It was ruled that personal current account unarranged overdraft charges can be assessed for fairness, and are therefore subject to regulations governing unfair contracts.

Joanne Davis, partner and head of asset finance, said there were three issues:

1. Whether the charges are subject to the Unfair Terms in Consumer Contract Regulations 1999

The court found that the charges could be assessed for fairness under the 1999 Regulations.

Regulation 6(2)(b) of the 1999 Regulations provides that so long as the written terms relating to overdraft charges are intelligible then the level of charges against the services supplied would not be used to judge whether the terms themselves were fair. The court held that the terms were in plain intelligible language, save for some minor aspects.

However, regulation 6(2)(b) did not exclude the terms under which charges were made for overdrafts from being assessed for fairness. Providing unarranged overdrafts is an essential part of the services supplied by banks and building societies when operating current accounts and was not merely incidental or ancillary. The overdraft charges were not made in exchange for the whole package of services provided by banks and building societies in relation to those current accounts.

The charges were also not remuneration in exchange for the service of providing an unarranged overdraft. As such they did not fall under regulation 6(2)(b) which states that in so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate to the adequacy pf the price or remuneration, as against the goods or services supplied in exchange. An assessment of the fairness of contractual terms would not question the adequacy of the level charges received in exchange for the services provided.

2. Whether the charges are capable of amounting to penalties

The court did, however, hold that the overdraft charges did not amount to penalties at common law. None of the provisions identified by the OFT meant that a customer was under a contractual commitment, such that breach of that commitment would result in a penalty.

3. Whether the charges are actually unfair

Whether the overdraft charges actually are unfair is still in question.

The judge also ruled that the banks’ current terms and conditions were, largely, in plain intelligible language. It is important to note that this judgment only covers points of legal principle and does not determine whether the relevant charges are actually unfair. It is still to be decided whether the overdraft charges actually are unfair, and if so, what level of charge will be fair.

The OFT is continuing with its investigation into the fairness of these terms, and is not expected to conclude its own investigations for several months.

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Joanne Davis

Partner
T: 08700 86 4171
I: +44 (0)121 625 4171
E: joanne.davis@shoosmiths.co.uk