The hearing of the final round of the bank charges litigation continued today.

The hearing is the culmination of very considerable litigation and public discussion concerning the charging structure of Britain’s high street banks.The complaints centre upon the charges that banks impose on customers for payments instructions for which customers have insufficient funds – classically, a “bounced cheque” – charge, and fees charged for going overdrawn, and the fact that they have little economic connection with the actual cost of those incidents to the banks.
For several years, these charges resulted in complaints, legal proceedings between customers and banks, media attention and pressure from pressure groups such as The Consumer Action Group. The OFT also launched an inquiry into their fairness.

By 2007, the number of individual court cases about bank charges were putting an unmanageable burden on the County Courts, and it was agreed between the banks, the FSA and the OFT that those issues would be resolved in a test case. Meanwhile, a moratorium on the County Court cases was imposed, pending conclusions of the test case.

This resulted in a very substantial piece of litigation which reached the High Court last spring ([2008] EWHC 875)

and the Court of Appeal earlier this year ([2009] EWCA Civ 116)

 Jonathan Crow QC of 4 Stone Buildings, a former “treasury devil”, is acting for the OFT against a raft of top commercial silks, heading up by Jonathan Sumption QC of Brick Court Chambers, for the banks. Lord Phillips heads of the panel of five Law Lords.

Two arguments were originally before the court. First was that the bank charges were unenforceable at common law because they were penalties. However, at first instance, Andrew Smith J held that the rules on penalties did not apply, because the charges were not payable on breaches of contract. His reasoning for this was the events that triggered the charges, e.g. going overdrawn, or writing a cheque when overdraft, did not constitute breaches of contracts by customers, but were simply events which led to specific consequences under the contract, namely the imposition of charges.

The second argument, which is now before the House of Lords, arises under the Unfair Terms in Consumer Contracts Regulations 1999.

Under the Regulations, the OFT can assess the fairness of a contractual terms providing the requirements of the Regulations are met, and this is what the OFT intends to do.

However, the banks take the position that the OFT is not entitled to assess the bank charges’ fairness, on the basis that under section 6(2) of the Regulations, “core issues” (those relating to “the definition of the main subject matter of the contract”) are excluded from their scope.
What the banks have said was that the charges form part of the “whole package” between the bank and its customer, and this is reflected by the “free if in credit” pricing structure which banks currently offer consumers.

Neither Andrew Smith J nor the Court of Appeal have accepted this, pointing out that incurring charges is “outside the ordinary conduct of the contractual relationship” and therefore do not form part of the essential bargain struck.

If the House of Lords agrees, and the OFT then goes on to determine that bank charges are unfair, which is thought likely, then the banks will face having to reimburse customers millions of pounds worth of charges, and may in response change their charging structure.


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