Legal: OFT loses unfair charges fight - is it finally over?

The Supreme Court ruled on 25 November last year that the Office of Fair Trading (OFT) may not launch an investigation into the fairness or otherwise of charges levied on retail bank customers for unauthorised overdrafts. The OFT then officially dropped the case on 22 December, with billions of pounds in potential compensation on the line. So is this long-running battle finally over? Jonathan Brogden, a partner at law firm, Davies Arnold Cooper, investigates

The judgment overruled an earlier ruling by the Court of Appeal that the OFT could investigate the fairness of bank overdraft charges. In fact, the Supreme Court ruling went against both lower court rulings. As one of its first decisions, it is likely to be remembered, but what does it mean in real terms? In my opinion, it could have limited value as the problem at the core of this litigation may be resolved by other means, as explained below.

Background to the OFT Case
The OFT has the power to assess the fairness of terms in consumer contracts. Its power to do so is, though, limited in that, "it shall not the adequacy of the price or remuneration, as against the goods or services supplied in exchange". In essence, the OFT may not assess fairness on a "value for money" basis. The OFT sought to investigate the fairness of terms in banks' contracts with customers that imposed charges on unauthorised overdrafts. The OFT sought a declaration that it was entitled to investigate, notwithstanding the stated limitations on its ability to do so. Both the High Court and the Court of Appeal declared that it could investigate without limitation. The Court of Appeal was of the view that the stated limitations only applied to "core terms" of the contract and not to ancillary terms such as charges for unauthorised overdrafts. The Supreme Court held that the stated limitation applied to the OFT's investigation.

Extent of Supreme Court's ruling
The key issue before the Supreme Court was whether the charges constituted the "price and remuneration" for "the goods or services supplied" to the customers. The Supreme Court held that they did, being part of the price paid in exchange for the package of services that made up a current account. Consequently, the charges were not paid "in exchange" for the particular transactions to which they related (i.e. a particular dishonoured cheque). The Supreme Court expressly disagreed with the Court of Appeal's finding that the charges were ancillary to the contract.

What is going to happen next?
While the decision of the Supreme Court is final (barring a reference to Europe), it has to be understood that it was a decision reached on narrow legal grounds. The courts were not asked to decide whether the bank charges were fair or unfair. The question before the court was whether, as a matter of law, the fairness of the bank charges levied on a personal current account customer in respect of unauthorised overdrafts could be challenged by the OFT as excessive in relation to the services supplied to customers. However, further challenges to the status quo are likely now to be made via different channels.

On 22 December 2009, the OFT formally announced that it would not seek to challenge the Supreme Court ruling and that it would not continue with its investigation. That said, the OFT has not given up on the issue and has announced that it will continue to consult with consumer groups, campaigners, banks, the government, the FSA and the Financial Ombudsman Service with a view to reporting on progress in March 2010.

It is now likely to be left to customers themselves to seek to bring actions against the banks. In this regard, the cost of litigation has always been prohibitive (which is why the OFT's action was so welcome by consumer groups). However, in November 2009, the government announced the Financial Services Bill which, in its draft form, seeks to give customers an ability to pursue US style class actions; opening up another potential angle of attack. However, it will not be until later in February 2010 that we will know exactly what form this right of action will take.

Another significant possibility is that the government will itself address the position in primary legislation. This point was recognised by the Supreme Court where Lord Walker said, in giving his input to the judgment, that in implementing the current law (derived from EU legislation) parliament had decided to transpose it as it stood rather than confer a higher degree of consumer protection and that parliament might wish to consider whether to revisit the issue. This will, however, be scant comfort for those presently affected as the legislation will not have retrospective effect.

The decision of the Supreme Court has dealt a hammer blow to millions of bank customers whose claims were on hold pending the outcome of the OFT case. It is anticipated that many of those claims will not now proceed. At the very least, customers will not be able to take the benefit of an OFT investigation, which was likely to have been influential on the courts approach to the claims. Other avenues - such as government primary legislation or class action suits - potentially remain open though, so there may yet be another twist in this long-running case.

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