Supreme Court Decision In Oft's Bank Charges Case: Analysis Of Scope For Further Challenge

Brief analysis: Supreme Court judgment A narrow victory for the banks … but the door remains open for challenge

The OFT's case fell on Reg 6(2) of the UTCCR because the Supreme Court held that bank charges were truly a core term of customers’ banking contracts; an essential part of the ‘price’ for banking services. Yet, the Supreme Court carefully acknowledged that their decision did not ‘end the matter’ (para 61, Lord Phillips' speech).

Lord Phillips identified a critical point of far-reaching significance. If regulation 6(2) engages then you cannot assess the fairness of that contractual term (bank charges) in relation to the adequacy of cost; this is the 'excluded assessment' construction adopted by Mr Justice Smith (at para 422) and this construction was not challenged before the Court of Appeal or the Supreme Court.

Contrast this against the alternative construction which says that if regulation 6(2) engages to a contractual term (e.g. for bank charges) then there can be no assessment of fairness in any circumstance under the UTCCR; this is known as the 'excluded term' construction.

This distinction in statutory construction is of fundamental and far-reaching importance. The Supreme Court explicitly stated that given the court’s and parties’ acceptance of the 'excluded assessment' construction, it followed that the regulation 5(1) test of fairness was a standalone test. Regulation 5(1) was not concerned with adequacy of price, instead it was concerned with 'a significant imbalance in the parties rights and obligations under the contract to the detriment of the consumer'.

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Thus, the Supreme Court identified (and almost positively encouraged) a fresh challenge to the fairness of bank charges under the UTCCR by establishing a standalone regulation 5 case. This door is open not only to individual consumers, and the OFT, but arguably the FSA.1

What might a regulation 5 case look like? There is ample evidence in the public domain that banks have acted in bad faith over their explanations to customers about the reason and purpose of bank charges.

When the UK banks gave evidence to the House of Commons Treasury Committee on how bank charges were calculated they said: "[bank charges] are going to pay for all the people we have who pursue debt, collect debt, speak to customers and chase payments. The way these charges are arrived at is by taking these total costs and making some assumptions about the volume that is going to come through to arrive at the individual charges" (House of Commons, 2nd report, 25 January 2005, paragraph 50: http://www.parliament.the-stationeryoffice.co.uk/pa/cm200405/cmselect/cmtreasy/274/27405.htm).

This explanation is entirely different to what the banks told the court in the OFT's test case. As Lord Walker summarises in his judgement in the Supreme Court’s decision, the 12 million UK customers who pay bank charges generate 30% of the banks' total revenue stream from current account customers and cross-subsidise 'free if in credit banking' to 42 million other UK customers who never (or very rarely) incur charges. To put it simply, one customer in the UK will pay for four other customers' retail banking service; and in Govan

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Upon the basis that as bank charges are now a core term of every banking contract - that is part of the overall price for the retail banking service – they are no longer a separate ancillary ‘credit issue’ under the Consumer Credit Act 1974 as amended. This means bank charges must fall under the FSA retail banking jurisdiction (which commenced 1 November 2009) and BCOBS et al would therefore apply.

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Law Centre’s experience, the customer who has to pay these charges can illafford them.

If we go back to 2006 the banks said (via the BBA publicly, or directly in correspondence to customers) that bank charges reflected the 'actual costs' to the bank of a customer going overdrawn without permission. This explanation was further refined by the banks as the 'manual intervention' justification, whereby one had to factor in the 'staff time’ involved in looking over a customers' personal account when they incurred unauthorised transaction charges.

By 2007, many banks had began to re-draft their standard terms and conditions of contract to remove references to 'default charges', and introduce a new explanation and justification for bank charges. Customers were told charges were 'fees' for the bank considering an informal application for an overdraft, which could either be declined or approved. But either way, the bank would impose a fee for this service. Ultimately, if it had not been for the OFT's test case, the public would have never learned the truth about what bank charges paid for.

If we turn now to the question of whether bank charges cause 'a significant imbalance in the parties rights and obligations under the contract to the detriment of the consumer' it is evident that the standard terms of UK banking contracts compel a minority of customers to subsidise the current account costs of the majority of customers.

This has never been explained to those customers – either at the point of opening an account, after the account has been opened, or when fees are increased. Indeed as already noted, the banks have been highly evasive on the true purpose of charges. It seems obvious to suggest that a contractual 3

charging structure which results in 12 million customers cross-subsidising 42 million other customers, must place subsiding customers at a significant disadvantage contractually. It would clearly be a matter for the court to decide whether this contractual obligation to subsidise was truly a significant imbalance to the detriment of the consumer.

However, we could certainly provide considerable evidence from case files (which could include a whole host of advice agencies and consumer organizations up and down the country) to show how this contractual position resulted in extremely serious consumer detriment.

To give but a few examples of the effect that a cross-subsiding bank charging structure in contracts has on customers:




Consumers are trapped within a cycle of debt, whereby once charges are applied to a customer’s account this results in an ongoing monthly deficit, resulting in ongoing monthly charges and interest, with the process locking the consumer into a financial position which they cannot easily escape from;




We could provide evidence to show that the charging structure was most commonly applied to vulnerable consumers – whether through reason of illness, relationship breakdown, social care problems, unemployment, loss of overtime, redundancy, temporary drop in household income, consumers affected by the recession, or credit crunch – and that charges exacerbated/directly led to either mental health problems and/or financial difficulties for vulnerable consumers;

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We could provide evidence which showed that the charging structure placed consumers at risk of mortgage repossession or eviction, by reducing their ability to meet payments to their mortgage or rent; and




That the charging structure resulted in some consumers being without any money for temporary periods, resulting in short periods of absolute destitution, and the inability to provide for staples such as food and heat.

Mike Dailly Principal Solicitor Govan Law Centre 26 November 2009

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