On 25 November 2009 the Supreme Court delivered an important Judgment which is likely to have an impact upon nearly a million claims brought by aggrieved banking customers. The Judgment is the response to an Office of Fair Trading (“OFT”) investigation into current account charges which began over 2 years ago. The Court’s decision is a reprieve for retail banking but is not the necessarily the end of the story.

Background

The case centred upon the current account charges levied by banks when their customers went overdrawn without prior arrangement, cheques bounced or other payments were made in the absence of funds in a customer’s account. Claims by consumers against their banks to recover the charges they had paid, plus interest, began in late 2005 and many were successful as the banks decided to settle the claims rather than proceed to Court. However, the number of claims grew rapidly and a rising consumer rebellion grabbed the attention of the media.

Claimants tended to argue that the charges were either illegal penalties or that the terms under which they were levied were unfair under the Unfair Contract Terms in Consumer Contract Regulations 1999 (“the Regulations”) and therefore unenforceable. In March 2007, the OFT began a formal investigation into the fairness of terms relating to the charges imposed by the 7 largest UK Banks and 1 Building Society (“the Banks”).

The Banks argued from an early stage that the terms were exempt from being assessed for fairness by the OFT under the Regulations because they were the equivalent of the price paid by customers for their accounts. The Regulations provide that the fairness of the price paid for goods or services is not something that can be assessed under the Regulations.  As the number of claims and public pressure grew, the Banks agreed that the OFT could apply to the Courts to seek a declaration regarding whether the fairness of the charges were subject to scrutiny under the Regulations and/or whether they could be challenged as illegal penalties.

Judge Andrew Smith gave Judgment in the High Court on 24 April 2008. He decided that the wording of the terms which permitted the Banks to make the charges were in “plain intelligible language” (except in the case of 4 banks) and that they were not exempt from scrutiny under the Regulations. The Banks appealed to the Court of Appeal.  On appeal, the Court of Appeal refused the Bank’s appeal and found that the Regulations did apply. Undeterred, the Banks appealed to the new Supreme Court.
 
Supreme Court Decision

The Supreme Court decided that the Court of Appeal’s analysis of the Regulations was flawed and agreed with the Banks that the lower Courts had overcomplicated the matter. It held that there is no legal basis upon which a Court can decide that some services provided by the Banks are more essential to the contract with the customer than others. The services that Banks offer their customers are a comparable package of services and that, in terms of current accounts, those in credit give up competitive interest on their deposits whilst defaulting customers pay charges.

In its Judgment, the Supreme Court went further and decided that it was not necessary to show that the particular charge related to a particular transaction as this is not how such fees are applied. It said that this form of charging was crucial to the “free, if in credit” system of banking that the Banks operate in England and Wales in that those customers in the red subsidise the costs that would otherwise be charged to those customers in the black. The Banks’ appeal was allowed and the Court declared that the charges could not be assessed for fairness as they fall within an exception relating to the cost of a service provided to a consumer (namely, Regulation 6(2)).

Although the decision has been trumpeted in the media as a resounding victory for the Banks, the Court did not tie up all the loose ends and highlighted an alternative challenge that could be pursued by the OFT. As Lord Philips explained, whilst the assessment of the fairness of the ‘price’ of the charges was excluded, this did not mean that the fairness of a term of a current account could not be assessed under Regulation 5(1) of the Regulations. Regulation 5(1) provides that the fairness of a contractual term (such as a term giving a bank the right to levy a charge) can be assessed for fairness if it causes a significant imbalance in the parties’ rights and obligations, to the detriment of the consumer.
 
Commentary

The Supreme Court’s decision is an unexpected but positive result for lenders as it confirms that charges are an integral part of the current account regime. Most, if not all of the claims issued by consumers challenged the legality of the charges either on the basis that they are a penalty at common law, which was rejected by the High Court, or that they were unfair under the Regulations on the basis put forward by the OFT. Unless the existing consumer claims are amended, it is likely that they will be struck out by the lower Courts who will follow the Supreme Court’s decision as a binding authority.

Consumers with remaining stamina may now try to amend their claims to reflect the alternative basis of a challenge to the fairness of the charges under the Regulations. The OFT may also wish to test this theory before the Courts. The Banks may have won this particular battle but the war between the consumers and the banks may not be over yet.

For further information please contact Georgina Squire or the Partner with whom you usually deal