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Bank charges judgment: The end of the matter?

27 November 2009

It has been a good couple of months for the UK's embattled banks. Last month, Barclays and others were successful in their appeal against the Competition Commission's ban on the sale of payment protection insurance at the point of sale of credit.

Then on 25 November seven banks and a building society (‘the banks’) were successful in the much publicised bank charges appeal in the Supreme Court. But have they dealt their opponents a knockout blow?

The appeal concerned the judgments of the High Court and Court of Appeal that the Office of Fair Trading (OFT) could, in relation to provisions of the Unfair Terms in Consumer Contract Regulations 1999, challenge the fairness of unauthorised overdraft charges levied on current account customers as excessive.

The banks appealed on the basis that as a matter of law the fairness of bank charges levied on personal current accounts could not be challenged by the OFT as excessive in relation to the services supplied by virtue of the provisions of Regulation 6(2) of the Regulations. 

Regulation 6(2) provides that 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 in exchange.

The key issue is whether the charges constitute the ‘price or remuneration, as against the services supplied in exchange’.

The lower courts concluded that the bank charges did not qualify as ‘price or remuneration’ within the meaning of those words in Regulation 6(2), but for very different reasons.

The High Court held that the charges were not covered by Regulation 6(2) because they were not the ‘price or remuneration’ for ‘services supplied in exchange’. They were not charged ‘in exchange’ for anything.

The Court of Appeal, on the other hand, held that the substance of a current account contract should be analysed as a package. It went on to divide the package into the ‘core and essential bargain’ and provisions that were ‘incidental or ancillary’, holding that Regulation 6(2) only applied to the former. It held that the charges were not part of the ‘core and essential bargain’ and did not fall within the scope of Regulation 6(2).

The Supreme Court agreed with the banks’ assertion that the lower courts’ approach had been over-elaborate. It held that the issue, although important, was quite a short one.  It held that the language of Regulation 6(2) was concerned with the two sides of the give and take inherent in any consumer contract – namely that consumer pays a price for the current account services it receives. 

The Supreme Court noted that a current account package of services includes the collection and payment of cheques, other money transmission services, facilities for cash distribution (mainly by cash machines either at manned branches or elsewhere), and the provision of statements in printed or electronic form. It held that there is no basis in Regulation 6(2) on which a court could decide that some services are more essential to the current account contract than others.

So on price and remuneration, a court cannot decide what elements of the price or remuneration payable are ‘essential’.

The Supreme Court saw no justification in excluding from the application of Regulation 6(2) price or remuneration on the ground that it is ‘ancillary or incidental price or remuneration’. If it is possible to identify such price or remuneration as being paid in exchange for services, even if the services are fringe or optional extras, Regulation 6(2) will preclude an attack on the price or remuneration in question if it is based on the contention that it was excessive by comparison with the services for which it was exchanged.
 
The Supreme Court therefore held charges were properly to be regarded as falling within the scope of the Regulation 6 (2). They were in fact part of the price or remuneration paid by the customer in exchange for the package of services which made up a current account.

So is this the end of the matter? Not necessarily. When the matter was before the High Court, the banks argued that a term of a contract that provided the ‘price or remuneration’ for ‘goods or services supplied’ was absolutely exempt from assessment for fairness by reason of Regulation 6(2).

The High Court disagreed and held that Regulation 6(2) precluded assessing a price term for fairness by reference to its adequacy as payment for the goods or services provided in exchange. It did not, however, preclude assessing a price term for fairness according to other criteria. 

Importantly, the banks did not appeal this point and the Supreme Court pointed out that whilst they may have succeeded on the narrow point at issue, this will not close the door on the OFT’s investigations and may well fail to resolve the myriad cases that are currently stayed in which customers have challenged Relevant Charges.

So the charges will still be open to attack by the OFT on the ground that they are ‘unfair’ as defined by Regulation 5(1) of the Regulations, but that attack cannot be founded on an allegation that the charges are excessive by comparison with the services which they purchase.

For example, as Lord Phillips states in paragraph 80 of the Supreme Court judgment, it may be open to question whether it is fair to subsidise some customers by levies on others who experience contingencies that they did not foresee when entering into their contracts. 

Whether the OFT has the appetite to continue the fight, we will have to wait until mid-December to see.

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Paul Estlin

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