In a judgment handed down on 25 November 2009, the Supreme Court overturned earlier rulings of the High Court and the Court of Appeal that would have allowed the Office of Fair Trading (OFT) to investigate the fairness of charges levied by banks for unauthorised overdrafts and other related charges under Regulation 6(2) of the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations). The ruling may mark the end of this particular test case, but it is unlikely to be the end of the OFT's involvement in relation to the fairness of bank charges.
The case itself revolves around the interpretation of a specific provision of the Regulations and it will now not be possible for the OFT to rely on that particular provision in order to assess the fairness of the charges. But the OFT has other measures at its disposal in order to address the issue. The charges remain open to attack by the OFT on the ground that they are “unfair” as defined by Regulation 5(1), although that attack cannot be founded on an allegation that the charges are excessive by comparison with the services which they purchase.
Another potential outcome, if no acceptable arrangement can be reached with the banks, is for the market on personal current accounts to be referred to the Competition Commission for a detailed market investigation.
In terms of further review of the charges, it should be noted that legislation is proposed in the Financial Services Bill to introduce collective actions for consumers in respect of financial services claims. The OFT would be an obvious "representative" for these purposes if a cause of action could be found. Please see our e-bulletin on the proposed regime for collective actions for financial services claims.
The Court also suggested that Parliament might want to consider changes to the Regulations.
Background to the case
In the UK, banks have evolved a “free-if-in-credit” charging structure in relation to personal current accounts, largely in response to customer preference. This means that customers do not pay fees for the day-to-day operation of current accounts, but interest is payable, and other charges may be imposed, if the account is in debit. The instant case centred around customers who had allowed their current accounts to go into debit without having obtained advance authority from their banks to overdraw, and had been charged as a result.
In 2006, following heightened public concern about the value that current accounts provide for UK consumers, and in particular about the fairness of bank charges imposed in respect of unarranged overdrafts, thousands of bank customers began to issue county court claims for the repayment of the charges under the Regulations.
The OFT, the banks and the Financial Services Authority (the FSA) agreed in July 2007 that the OFT should bring a test case against the banks to establish whether it was entitled to conduct an investigation into the fairness of the charges under the Regulations. The FSA allowed banks to put existing complaints on hold pending the outcome of the test case.
Application of the Regulations to the bank charges
The Regulations implement EC Directive 93/13 on Unfair Terms in Consumer Contracts (the Directive). They apply to contracts concluded with consumers and provide that a contractual term, which has not been individually negotiated, shall be regarded as unfair if it causes a significant imbalance in the parties' rights and obligations to the detriment of the consumer.
Regulation 6(2), (which implements Article 4(2) of the Directive), does exclude certain provisions from the assessment of fairness under the Regulations. It provides that:
'In so far as it is in plain intelligible language, 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 supplied in exchange'.
The key issue at stake was therefore whether the challenged bank charges are part of the price or remuneration paid by customers in exchange for the package of services which make up a current account, which is purely a matter of the interpretation of Regulation 6(2).
The High Court
The banks claimed that the OFT did not have the power to review the fairness of terms providing for the charges, because this would amount to an assessment relating to the adequacy of the charges as against the services provided which was excluded by the Regulations, provided that the terms in question were in plain and intelligible language. The OFT argued that the restriction in Regulation 6(2)(b) did not apply to the charges. In May 2008, the High Court ruled that the charges were not exempted from a fairness assessment because:
- they were not levied in exchange for services, but rather were levied because the payment and lending services were provided in particular circumstances; and
- the charges were only a part of the benefits received by the banks for the package of services they provide, and so assessment of fairness of the charges did not involve an assessment of the adequacy of the whole bargain.
The Court of Appeal
The Court of Appeal reached the same conclusion as the High Court, but by a different process of reasoning. The Court of Appeal found that each of the events that triggered a liability to pay the charges involved the provision of a service. However, it was not realistic to consider that each charge was payment for the individual service that occasioned its imposition. Rather, the substance of the contract had to be analysed as a package. The Court went on to divide the package into the “core or essential bargain” and provisions that were “incidental or ancillary”, holding that Regulation 6(2) only applied to the former. The core or essential bargain was comprised of those matters to which the typical consumer would have regard when deciding whether to enter into the agreement with the bank. The latter would be those to which he would not attach importance when concluding the contract.
The Supreme Court
The Supreme Court found that the High Court and the Court of Appeal had unnecessarily complicated their analysis of the interpretation of Regulation 6(2) and had misread Regulation 6(2) as concerned only with what was a core or essential part of the bargain, to which the consumer may be supposed to have consented in a meaningful sense. It concluded that it was clear that the relevant charges are part of the price or remuneration for the package of services the banks agree to supply in exchange and do therefore fall squarely within Regulation 6(2).
Under the UK's 'free if in credit' approach to bank charges on current accounts, monetary consideration for banks consists of interest and charges on authorised and unauthorised overdrafts. Charges for unauthorised overdrafts are monetary consideration for the package of banking services supplied to personal current account customers. They are an important part of the charging structure, amounting to over 30% of their revenue stream from all personal current account customers. Banks rely on the relevant charges as an important part of the revenue they generate from the current account services. The fact that the charges are contingent, and that the majority of customers do not incur them, are irrelevant. On this view, the fairness of the charges would be exempt from review, under Regulation 6(2)(b). The Court could not see how the Court of Appeal could have come to the conclusion that charges amounting to over 30% of the revenue stream were not part of the core or essential bargain.
Is so far as the terms giving rise to the charges are in plain intelligible language, no assessment under the Regulations of the fairness of those terms may relate to their adequacy as against the services supplied.
The Supreme Court accepted that the outcome may cause great disappointment and dismay to a large number of bank customers, but emphasised that it did not have the task of deciding whether the system of charging personal account customers adopted by UK banks was fair. The Court suggested that Parliament may wish to revisit the way in which the UK has implemented the EU Directive. When the UK implemented the Directive it decided to transpose the Directive as it stood, without adopting a higher degree of consumer protection than required. Other Member States took a different approach and countries such as Spain and The Netherlands enacted more far-reaching legislation affording consumers greater protection.
The new proposed Consumer Rights Directive
At the end of 2008 the European Commission published a proposal for a Consumer Rights Directive. The proposed Directive will replace four current directives relating to consumer protection, one of which is the Directive on Unfair Terms in Consumer Contracts. The proposal moves away from the minimum harmonisation approach (under which Member States may maintain or adopt stricter national rules than those laid down in the directive), towards a full harmonisation approach under which Member States cannot adopt provisions diverging from those laid down in the directive. Although the text is likely to undergo a number of changes before it is adopted, as currently drafted there is a similar exception in respect of the assessment of the main subject matter of the contract or the adequacy of the remuneration for the main contractual obligation. It will not be possible for Member States to override this exception in order to provide a higher degree of consumer protection (although this could presumably not apply retrospectively). It may therefore be necessary to go down a different route in order to deal with any unfairness resulting from the charges.
Possible market investigation
This could potentially take the shape of a market investigation by the Competition Commission. In April 2007 the OFT launched a market study into the pricing of personal current accounts, in order to examine whether 'free-in-credit' current accounts deliver benefits to consumers and whether other pricing models should be considered. In July 2008 the OFT concluded that the market may not work well for consumers, and unarranged overdraft charges were highlighted as one particular problem area. The OFT concluded that there was much the banks could do to improve the personal accounts market and stated that it would spend time talking to banks and consumer groups to try and achieve greater clarity and transparency. In the absence of agreement on changes to the functioning of this market, the OFT said it would consider whether to refer the market for personal current accounts to the Competition Commission. In October 2009 the OFT published a further report, setting out the follow up of its work done since the publication of its market study on personal current accounts, in which it restated that the concerns identified in relation to charges need to be addressed by a significant change in the way the charges operate. The OFT wants to see a market where consumers can easily predict how much a product will cost them and can readily control the overall cost. Any more substantive comments on its thinking had been placed on hold pending the outcome of the Supreme Court's ruling, and the OFT now expects to make a further announcement next month.