Last November the Money Programme revealed how large numbers of customers were successfully taking court action to retrieve charges made by their banks for exceeding overdraft limits and for other bank account ‘misdemeanours’.
Such charges are a major money spinner for the UK banks. Whilst it is unclear exactly how much UK banks earn from them, best estimates suggest a figure of between £2 billion and £3.5 billion a year. The consumer campaign against these charges has made the banks start to talk about the possibility of charging all customers for current accounts to compensate for the revenue stream that would be lost if these unauthorised overdraft charges are deemed unfair.
Arguably the court cases are being won by customers because the banks are not adequately defending the actions - relying only on a written defence and not turning up in court to argue their case. This tactic has resulted in judicial criticism from several County Court judges. Additionally some banks have been settling cases out of court, perhaps because the time and cost of even a limited defence in court is not viewed as being cost effective even if judgment is made in their favour.
Over the past twelve months the story has developed further, with attention focussing on action to clarify the legality of these bank charges.
In March the Office of Fair Trading (OFT) announced a formal investigation into the fairness of unauthorised overdraft charges. This followed on from the OFT’s initial review where it concluded that it shared public concern about the level and incidence of such charges. The OFT recognised, though, that applying the general principles it had set out in 2006 in respect of credit card charges - where the OFT recommended a maximum default charge of £12 - was not straightforward.
Subsequently, in April, the OFT announced details of a more wide ranging investigation into bank charges - including the examination of so-called ‘free banking’ and the implications of moving towards the charging of customers for provision of current account. This investigation sits alongside that into the fairness of unauthorised overdraft charges.
Then in May the Lloyds TSB became the first bank to successfully defend actions by customers trying to reclaim charges, with victories in the Birmingham and Lancaster County Courts. Other banks are now using these judgments to defend cases brought against them.
At the heart of the issue lies the question of whether the 1999 ‘Unfair Terms in Consumer Contract Regulations’ (UTCCRs) apply to unauthorised overdraft charges. The banks believe the rules do not apply; the OFT believes that they do. So given the lack of clarity the OFT launched proceedings in the High Court in July for a legal declaration on the applicability of the law. The other parties to the test case are the Abbey National, Barclays Bank, Clydesdale Bank, HBOS, HSBC, Lloyds TSB, the Royal Bank of Scotland and the Nationwide Building Society. Together these current account providers account for circa 90% of personal current accounts in the UK. The parties to the action are all interested in a timely and orderly resolution of this legal issue. Clearly the banks need to know where they stand on a matter which has attracted so much adverse publicity for them.
In September the OFT announced that it would consider dropping the test case if the banks unilaterally cut charges significantly. Under these circumstances it would no longer be in the interests of consumers to press on with the case. Currently, however, the OFT is still set to continue with its test case which is scheduled to be heard early in 2008.
The outcome of this case will shape the future not only for such overdraft charges but, in all likelihood, for the charging for the provision of current accounts for all customers.