Court of Appeal: Final word on the requirement of fairness for bank charges?

The Court of Appeal has now heard the ongoing litigation brought by the Office of Fair Trading (“OFT”) concerning the fairness of bank charges and has concluded that unarranged overdraft charges are subject to the rules of fairness.

An unarranged overdraft charge is a charge a customer incurs if they attempt to make a payment from a personal current account and do not have enough funds in the account to cover that payment. The OFT began investigating these charges in April 2007 and considered that many banks were charging excessive unarranged overdraft charges and that these charges may not be operating fairly for the customer. The OFT brought a test case (Office of Fair Trading v Abbey National Plc & Others [2008] EWHC 875 (Comm)) against eight banks seeking a declaration as to whether the rules of fairness under the 1999 Unfair Terms in Consumer Contracts Regulations (“Regulations”) apply to unarranged overdraft charges. Under the Regulations, a charge must be fair in order to bind the customer. The Defendant banks argued that the fairness rules under the Regulations did not apply because the charges were exempt under Regulation 6(2)(b). In April 2008, the High Court granted a declaration that the rules of fairness under the Regulations did apply to bank overdraft charges, as the charges were not exempt under Regulation 6(2)(b). The Defendant banks subsequently appealed to the Court of Appeal.

On the 26 February 2009, the Court of Appeal confirmed that unarranged overdraft bank charges are subject to fairness. It concluded that these charges were ‘not part of the core or essential bargain’ between the parties and therefore were not exempt from the Regulations. Accordingly, unarranged overdraft charges must be properly assessed for fairness. The Court of Appeal’s judgment has clarified an important area of consumer law and the OFT considers that it will impact upon businesses in general.

The OFT are now assessing whether the unarranged overdraft charges in question are actually unfair and should reach a decision later this year. It has already begun writing to the Defendant banks setting out why it considers their terms and charges may be unfair. It will be interesting to see how the banking world reacts to this development. Despite the Court of Appeal not granting leave to appeal to the House of Lords and advising the Defendants to now let the OFT decide the fairness of the charges, the British Bankers Association has made it clear that the Defendants do intend to appeal directly to the House of Lords for a review of this latest decision. A further appeal would not only incur significant costs in an already expensive litigation, it will also prolong the OFT’s investigation and further delay around 65,000 county court claims brought by individual customers that must remain stayed until this issue is resolved. It is therefore likely that the OFT’s investigation will continue into 2010.