Brief analysis: Supreme Court judgment

A narrow victory for the banks … but the door remains open for

challenge

The OFT's case fell on Reg 6(2) of the UTCCR because the Supreme Court held

that bank charges were truly a core term of customers’ banking contracts; an

essential part of the ‘price’ for banking services. Yet, the Supreme Court

carefully acknowledged that their decision did not ‘end the matter’ (para 61,

Lord Phillips' speech).

Lord Phillips identified a critical point of far-reaching significance. If

regulation 6(2) engages then you cannot assess the fairness of that contractual

term (bank charges) in relation to the adequacy of cost; this is the 'excluded

assessment' construction adopted by Mr Justice Smith (at para 422) and this

construction was not challenged before the Court of Appeal or the Supreme

Court.

Contrast this against the alternative construction which says that if regulation

6(2) engages to a contractual term (e.g. for bank charges) then there can be no

assessment of fairness in any circumstance under the UTCCR; this is known

as the 'excluded term' construction.

This distinction in statutory construction is of fundamental and far-reaching

importance. The Supreme Court explicitly stated that given the court’s and

parties’ acceptance of the 'excluded assessment' construction, it followed that

the regulation 5(1) test of fairness was a standalone test. Regulation 5(1) was

not concerned with adequacy of price, instead it was concerned with 'a

significant imbalance in the parties rights and obligations under the contract to the

detriment of the consumer'.

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Thus, the Supreme Court identified (and almost positively encouraged) a

fresh challenge to the fairness of bank charges under the UTCCR by

establishing a standalone regulation 5 case. This door is open not only to

individual consumers, and the OFT, but arguably the FSA.1

What might a regulation 5 case look like?

There is ample evidence in the public domain that banks have acted in bad

faith over their explanations to customers about the reason and purpose of

bank charges.

When the UK banks gave evidence to the House of Commons Treasury

Committee on how bank charges were calculated they said: "[bank charges]

are going to pay for all the people we have who pursue debt, collect debt, speak to

customers and chase payments. The way these charges are arrived at is by taking these

total costs and making some assumptions about the volume that is going to come

through to arrive at the individual charges" (House of Commons, 2nd report, 25

January 2005, paragraph 50: http://www.parliament.the-stationery-

office.co.uk/pa/cm200405/cmselect/cmtreasy/274/27405.htm).

This explanation is entirely different to what the banks told the court in the

OFT's test case. As Lord Walker summarises in his judgement in the Supreme

Court’s decision, the 12 million UK customers who pay bank charges generate

30% of the banks' total revenue stream from current account customers and

cross-subsidise 'free if in credit banking' to 42 million other UK customers who

never (or very rarely) incur charges. To put it simply, one customer in the

UK will pay for four other customers' retail banking service; and in Govan

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Upon the basis that as bank charges are now a core term of every banking contract - that is part of the
overall price for the retail banking service – they are no longer a separate ancillary ‘credit issue’ under
the Consumer Credit Act 1974 as amended. This means bank charges must fall under the FSA retail
banking jurisdiction (which commenced 1 November 2009) and BCOBS et al would therefore apply.

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Law Centre’s experience, the customer who has to pay these charges can ill-

afford them.

If we go back to 2006 the banks said (via the BBA publicly, or directly in

correspondence to customers) that bank charges reflected the 'actual costs' to

the bank of a customer going overdrawn without permission. This

explanation was further refined by the banks as the 'manual intervention'

justification, whereby one had to factor in the 'staff time’ involved in looking

over a customers' personal account when they incurred unauthorised

transaction charges.

By 2007, many banks had began to re-draft their standard terms and

conditions of contract to remove references to 'default charges', and introduce a

new explanation and justification for bank charges. Customers were told

charges were 'fees' for the bank considering an informal application for an

overdraft, which could either be declined or approved. But either way, the

bank would impose a fee for this service. Ultimately, if it had not been for

the OFT's test case, the public would have never learned the truth about what

bank charges paid for.

If we turn now to the question of whether bank charges cause 'a significant

imbalance in the parties rights and obligations under the contract to the detriment of

the consumer' it is evident that the standard terms of UK banking contracts

compel a minority of customers to subsidise the current account costs of the

majority of customers.

This has never been explained to those customers – either at the point of

opening an account, after the account has been opened, or when fees are

increased. Indeed as already noted, the banks have been highly evasive on

the true purpose of charges. It seems obvious to suggest that a contractual

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charging structure which results in 12 million customers cross-subsidising 42

million other customers, must place subsiding customers at a significant

disadvantage contractually. It would clearly be a matter for the court to

decide whether this contractual obligation to subsidise was truly a significant

imbalance to the detriment of the consumer.

However, we could certainly provide considerable evidence from case files

(which could include a whole host of advice agencies and consumer

organizations up and down the country) to show how this contractual

position resulted in extremely serious consumer detriment.

To give but a few examples of the effect that a cross-subsiding bank charging

structure in contracts has on customers:

Consumers are trapped within a cycle of debt, whereby once charges

are applied to a customer’s account this results in an ongoing monthly

deficit, resulting in ongoing monthly charges and interest, with the

process locking the consumer into a financial position which they

cannot easily escape from;

We could provide evidence to show that the charging structure was

most commonly applied to vulnerable consumers – whether through

reason of illness, relationship breakdown, social care problems,

unemployment, loss of overtime, redundancy, temporary drop in

household income, consumers affected by the recession, or credit

crunch – and that charges exacerbated/directly led to either mental

health problems and/or financial difficulties for vulnerable consumers;

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We could provide evidence which showed that the charging structure

placed consumers at risk of mortgage repossession or eviction, by

reducing their ability to meet payments to their mortgage or rent; and

That the charging structure resulted in some consumers being without

any money for temporary periods, resulting in short periods of

absolute destitution, and the inability to provide for staples such as

food and heat.

Mike Dailly
Principal Solicitor
Govan Law Centre

26 November 2009