The OFT has lost its test case in the Supreme Court on unarranged overdraft charges.

To the surprise of many, the Supreme Court overturned the High Court and the Court of Appeal and ruled against the OFT in its test case on unarranged overdraft charges.  The case helps to clarify the scope for consumer contracts in general to be challenged on the grounds that they are unfair.

Terms in consumer contracts can be challenged under the Unfair Terms in Consumer Contract Regulations 1999 (the Regulations).  If a term is unfair, it is not binding on the consumer although the rest of the contract will continue in effect if it can do so without the unfair term.  In addition to claims brought by individual consumers, the OFT has power to carry out a general investigation.

However, there are two aspects of a contract that cannot be challenged as being unfair.  These are, firstly, the definition of the main subject matter of the contract and, secondly, the adequacy of the price or remuneration, as against the goods or services supplied in exchange.  This means that a contract cannot be found to be unfair under the Regulations simply on the basis that it does not represent value for money.

The OFT was seeking to establish that banks' charges for unauthorised overdrafts fell outside this exclusion.  It succeeded in the High Court on the basis that these particular charges were not "in exchange" for any services.  The Court of Appeal and the Supreme Court disagreed, holding that unauthorised overdraft charges were part of the price paid by the consumer in exchange for the package of banking services which made up a current account. 

However, the Court of Appeal found in favour of the OFT, on the basis that the exclusion from challenge applied only to the "core terms" of the contract and that the overdraft charges, as ancillary terms, could be assessed for fairness under the Regulations.

The Supreme Court rejected the Court of Appeal's approach of dividing the current account package into core and ancillary terms.  There was no basis for regarding the unauthorised overdraft charges as ancillary.  The facts that the overdraft charges were contingent, and that the majority of customers do not incur them, are irrelevant.

The Supreme Court therefore concluded that unauthorised overdraft charges fall within the exclusion in the Regulations.  This means that they cannot be challenged as unfair if the basis of the challenge is that, by reason of their inclusion in the pricing package, those who pay them are being charged an excessive amount in exchange for their current accounts.

The Supreme Court ruling does not mean the charges are immune from all challenge under the Regulations, only that they cannot be challenged as excessive in relation to the services received in exchange.  Although this removes a central plank of the OFT investigation, the charges might still be found to be unfair on some other ground.

In the Supreme Court, one of the judges suggested that:

"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." 

The OFT has considered this cross subsidy argument, and concluded a challenge on this basis would not have a realistic prospect of success.  This is because one of the elements of the test of unfairness in the Regulations is that the term must cause a significant imbalance in the parties' rights and obligations under the contract.  The relevant approach is to assess the rights and obligations of the parties to the contract, i.e. those of the bank and the customer.  The comparison is not between the bank and the whole body of its customers generally or between different groups of customers.

A more promising ground for challenge would exist if a particular overdraft contract does not set out the unauthorised overdraft charges in plain intelligible language.  This obviously must be considered on a case by case basis.  In the test case, in the High Court, the current wording used by the banks and building societies involved was considered and in some cases was found to be in plain intelligible language.  The others were found to be lacking in some relatively minor respects.  Many customers will have been charged under older versions of contractual wording which has not yet been assessed by the courts.

The OFT has announced that it will not be continuing its investigation into unauthorised overdraft charges under the Regulations.  However, it intends to continue to press for improvements in three key areas: customer control, including a real choice about whether to have a facility that allows them to go into unarranged overdraft; clarity and predictability of charging; and banks' duty not to lend irresponsibly. 

The OFT aims to report on progress in these areas by the end of March 2010.  In its Pre-Budget Report on 9 December 2009, the government noted that it "will take action to deliver change if a voluntary approach does not result in a fair outcome for consumers."

The Supreme Court ruling in relation to overdraft charges will affect the interpretation of the Regulations in other areas.  For example, the letting agent Foxtons has indicated that it now intends to appeal a High Court ruling that the renewal commissions it charged landlords were unfair.  The High Court in this case followed the Court of Appeal ruling in the bank charges case, and could now be open to challenge on the basis of the Supreme Court decision.  However, the court also held that Foxtons' contracts were not in plain intelligible language.
 

Contact

For more information on competition and regulatory matters, please contact:

Michael Dean
Partner
0141 303 2415
michael.dean@mms.co.uk

Catriona Munro
Partner
0141 303 2385
catriona.munro@mms.co.uk

David McGowan
Associate
0141 303 2482
david.mcgowan@mms.co.uk

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