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Economy

OFT wins right to challenge bank charges

Thursday, 24 April 2008

The Office of Fair Trading can apply consumer contract regulations to decide if bank charges are unfair, the High Court has ruled.

Mr Justic Andrew Smith said that the ruling did not mean that overdraft charges were necessarily unfair.

The judgement set out the judge's ruling and reasoning on a range of legal issues, including ruling that the banks' relevant terms and conditions were in, or largely in, plain intelligible language and that the banks' unarranged overdraft charges were not penalties at common law.

Unarranged overdraft charges

In April 2007 the OFT announced its investigation into the fairness of unarranged overdraft and returned item fees, referred to as 'unarranged overdraft charges'.

This followed on from the OFT's initial review of such charges, where the OFT concluded that it shared the public concern about the level and incidence of bank current account charges.

By then, thousands of current account holders had started to swamp the banks with requests for a refund of the charges.

In July 2007 the OFT agreed with the largest current account providers to bring a test case in order to ensure an orderly and timely resolution of the legal issues associated with its investigation.

This stage of the case was heard between 17 January and 8 February 2008, and dealt with certain preliminary issues of legal principle relating to whether the Unfair Terms in Consumer Contracts Regulations 1999 apply to the banks' various current terms and conditions and whether the charges are capable of amounting to penalties at common law.

The other parties to the test case are 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.

Together these current account providers account for about 90 per cent of personal current accounts in the UK.

Terms assessed for fairness

For years, banks have been hitting their customers with fees of up to £38 every time they slip into an unauthorised overdraft – a practice that generates up to £3.5 billion a year, according to OFT estimates.

The High Court was asked to decided whether an assessment can take place for T&Cs currently used by the banks, as well as those T&Cs used over the last six years.

Now that the judge has decided that the banks’ current T&Cs can be assessed for fairness, the OFT will be able to make this assessment.

The OFT has already started this process so that the issue should be able to be resolved swiftly following their win in the test case.

The issue of historic T&C’s is more complex, and really only arises because of the thousands of bank charges cases that have been launched in the county courts.

Which? personal finance campaigns manager, Doug Taylor, said earlier on Thursday that if the judge were to find in favour of the OFT then the banks should do the right thing and resolve their customers’ claims as quickly as possible.

"If they try to drag the process out any longer they will only be doing more damage to their reputations. Every second that passes is costing consumers £111. In fact, by Sunday, the banks will have hit their customers with £1 billion in unauthorised overdraft charges since the test case began in January,” Taylor concluded.

Future refund claims

HSBC became the first bank to put a figure on the amount of money it expects to have to return to customers after the bank charges test case.

The bank's annual report, announced in March 2008, contained an estimate of £300m for future refund claims in respect of overdraft charges.

This amount was in addition to the £115m HSBC already returned to account holders before the High Court froze all claims pending its decision. The banks, however, remained free to apply overdraft charges during the proceedings.

The British Banker's Association (BBA) said in a statement that the judgement was complex and that the banks were considering its implications.

Further Court hearings will be required before the test case process is concluded. The likely timetable for the next steps in the test case process will be decided by the Court at a hearing which will take place on 22 May 2008.

"As previously agreed with the Financial Ombudsman Service and the FSA, customer complaints relating to unauthorised overdraft charges will currently remain on hold. The banks will continue to ask County and Sheriff Courts to keep cases relating to unauthorised overdraft charges on hold until the test case process is concluded," the BBA said.

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