Supreme Court gives long-awaited ruling that banks’ charges cannot be considered for reasonableness under Consumer fairness laws – OFT v Abbey National, House of Lords…

Under the Unfair Terms in Consumer Contracts Regulations 1999, as between a supplier and a consumer, any contractual terms not individually negotiated shall be unfair and therefore unenforceable if they cause a significant imbalance in the parties’ rights and obligations to the consumer’s detriment. The assessment of a term’s fairness shall not relate to the definition of the main subject matter of the contract or to the adequacy of the price or remuneration. Aside from the fairness test, suppliers’ standard terms and conditions with consumers need to be in plain English.

The Office of Fair Trading wanted to bring a test case to see if banks’ current account charges were fair. In particular, it was concerned on behalf of consumer bodies that overdraft charges were excessive. Several banks co-operated and they fought a test case that eventually went to the Supreme Court (previously known as the House of Lords). Rather than fight the entire battle as to the issue of fairness of the actual terms, the initial skirmish looked to resolve whether the overdraft charges were excluded from an assessment of fairness. The issue was whether the charges were part of the price or remuneration and so should not be considered.

The High Court and Court of Appeal ruled that the terms were in plain, intelligible English, but  sided with the OFT on the fairness point. Now, in one of its first judgments since being formed, the Supreme Court has given its landmark judgment that affects millions of people. It has gone the other way and sided totally with the banks on this issue.

The Supreme Court said that the banks were correct in saying that the charges were part of the payment in exchange for a global package of services. The Court of Appeal had no basis for having said that some bits of the goods or services or price were ‘essential’ items and more important than others. Any monetary price or remuneration or goods or services provided would fall within the exemption. Banking services were part of a package of services and the price paid by consumers included the charges for going overdrawn. It is irrelevant that the charges are contingent or not incurred by the majority of customers. Even if some goods or services are ancillary to the overall banking service, if the charges for them are under the same contract then they are all part of the price for the purposes of the exemption.

The Supreme Court added that the OFT was wrong to argue that the admin charges were default charges – consumers were not in breach of contract by going overdrawn, but it was expected that they may go into overdraft from time to time and they would have to pay a charge for using that part of the service. Those charges were an important part of the banks’ revenue streams and were not intended to be seen as consumers defaulting on the contract.

As Lady Hale from the Supreme Court said, consumer law aims to give consumers informed choices rather than to protect them from making choices that may be unwise for them. Paul Gershlick, editor of www.Upload-IT.com and a Partner at Matthew Arnold & Baldwin LLP, says: ‘This is a great result for the banking sector and most banking customers – banks would otherwise have had to charge for their other services in other ways and a different result could have spelt the end of free retail banking. The judgment is also good, because there has been a lot of uncertainty in the business world about charging extra ‘admin’ costs. This ruling shows that as long as the charges are presented in a clear way with the contract terms, if they form part of the same overall contract for the goods or services, their amount cannot be challenged. The aim of the 1999 Regulations is to protect consumers from terms which they may not be aware of in the small print, but consumers should be taken to have given enough attention to what they have bought and what they are paying for that.’