Brief analysis: Supreme Court judgment

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

The OFT's case fell on Reg 6(2) of the UTCCR because the Supreme Court heldthat bank charges were truly a core term of customers’ banking contracts; anessential part of the ‘price’ for banking services. Yet, the Supreme Courtcarefully acknowledged that their decision did not ‘

end the matter’

(para 61,Lord Phillips' speech).Lord Phillips identified a critical point of far-reaching significance. Ifregulation 6(2) engages then you cannot assess the fairness of that contractualterm (bank charges) in relation to the adequacy of cost; this is the

'excludedassessment'

construction adopted by Mr Justice Smith (at para 422) and thisconstruction was not challenged before the Court of Appeal or the SupremeCourt.Contrast this against the alternative construction which says that if regulation6(2) engages to a contractual term (e.g. for bank charges) then there can be noassessment of fairness in any circumstance under the UTCCR; this is knownas the

'excluded term'

construction.This distinction in statutory construction is of fundamental and far-reachingimportance. The Supreme Court explicitly stated that given the court’s andparties’ acceptance of the

'excluded assessment'

construction, it followed thatthe regulation 5(1) test of fairness was a standalone test. Regulation 5(1) wasnot concerned with adequacy of price, instead it was concerned with

'asignificant imbalance in the parties rights and obligations under the contract to thedetriment of the consumer'

Thus, the Supreme Court identified (and almost positively encouraged) afresh challenge to the fairness of bank charges under the UTCCR byestablishing a standalone regulation 5 case. This door is open not only toindividual consumers, and the OFT, but arguably the FSA.

What might a regulation 5 case look like?

There is ample evidence in the public domain that banks have acted in badfaith over their explanations to customers about the reason and purpose of bank charges.When the UK banks gave evidence to the House of Commons TreasuryCommittee 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 tocustomers and chase payments. The way these charges are arrived at is by taking thesetotal costs and making some assumptions about the volume that is going to comethrough 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 theOFT's test case. As Lord Walker summarises in his judgement in the SupremeCourt’s decision, the 12 million UK customers who pay bank charges generate30% of the banks' total revenue stream from current account customers andcross-subsidise

'free if in credit banking'

to 42 million other UK customers whonever (or very rarely) incur charges. To put it simply, one customer in theUK will pay for four other customers' retail banking service; and in Govan

Upon the basis that as bank charges are now a core term of every banking contract - that is part of theoverall 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.

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 incorrespondence to customers) that bank charges reflected the

'actual costs'

tothe bank of a customer going overdrawn without permission. Thisexplanation was further refined by the banks as the

'manual intervention'

justification, whereby one had to factor in the

'staff time’

involved in lookingover a customers' personal account when they incurred unauthorisedtransaction charges.By 2007, many banks had began to re-draft their standard terms andconditions of contract to remove references to

'default charges'

, and introduce anew explanation and justification for bank charges. Customers were toldcharges were '

fees

' for the bank considering an informal application for anoverdraft, 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 forthe 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 significantimbalance 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 contractscompel a minority of customers to subsidise the current account costs of themajority of customers.This has never been explained to those customers – either at the point ofopening an account, after the account has been opened, or when fees areincreased. Indeed as already noted, the banks have been highly evasive onthe true purpose of charges. It seems obvious to suggest that a contractual