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Office of Fair Trading v Abbey National and Others (2008)
Encyclopedia
Office of Fair Trading v Abbey National plc and Others [2009] UKSC 6, [2009] EWCA 116, [2008] EWHC 875 (Comm) is a case about bank charges
in the United Kingdom
, concerning the situation where a bank account holder goes into unauthorised overdraft.
When a bank customer makes a payment request (whether by standing order, direct debit or using an ATM or debit card), banks generally make the payment as requested, and then charge fees (which may include "paid item" charges and unauthorised overdraft fees) which accrue on a daily basis whilst the unauthorised overdraft continues. The Office of Fair Trading
('OFT'), acting on behalf of consumers, challenged these fees under the Unfair Terms in Consumer Contracts Regulations 1999
('UTCCR'), which implements European Union Unfair Contract Terms Directive. OFT claimed the sizeable fees charged were not a fair reflection of the banks' costs but were instead a penalty upon the consumer or bank account holder, hence unlawful. If these fees were confirmed to be a penalty for breach of contract then under UK law the amount that could be charged would be limited to reflect the actual (and considerably lower) costs which were incurred by the bank.
The High Court held that although the charges were not penal, they fell within the remit of the legislation and hence their fairness could be assessed by the OFT. The Court of Appeal agreed and held unanimously and emphatically that the charges could be assessed for fairness. But the UK Supreme Court reversed this decision, holding that the charges could not be assessed for fairness by the OFT
, or the courts. They held that UTCCR 1999 r 6(2), as the United Kingdom chose to implement the European Directive, precluded any assessment of the "core terms" of a contract, and because overdraft fees related to a bank's remuneration, the fees charged to consumers could not be challenged. Baroness Hale asserted that while the court had no power to do anything, Parliament could have chosen to construe the directive more broadly, and it would be up to the legislature to decide differently. The Supreme Court denied any reference to the European Court of Justice
(through art 234 TEC), so bringing to an end the litigation. The regulations could be challenged as failing to implement the directive through a separate case, but since any decision by the ECJ would be prospective only the government, and not the banks, would have to pay any compensation. This may be unlikely, since the Directive gives a discretion to member states to regulate all terms or non-core terms.
, Barclays Bank, Clydesdale Bank
, HBOS
, HSBC Bank
, Lloyds TSB
, Nationwide Building Society
and the Royal Bank of Scotland
asked for declarations that their standard terms for charging customers were incapable of being penalties at common law. The OFT investigated charges where bank customers requested or instructed a bank to make a payment for which they had no necessary funds and was beyond an overdraft. The OFT argued that the breach of contract was not going into overdraft, but the customer telling his bank to go into overdraft. The bank argued that using a card without funds was a breach and therefore the charge was not penal.
The case was sparked initially by the request of Stephen Hone, a law student from Plymouth, England, for a refund of charges by Abbey
. He argued that under the UTCCR, all penalty charges had to truly reflect the cost of administering them. Hone believed that penalty charges which are higher than their administrative costs are illegal. After filing in small claims court against Abbey, Hone eventually recovered £5000 from the bank, although his original claim was for £840. The banks then sought a declaration that their charges for exceeding overdraft limits were not penalty clauses.
The banks, engaging 9 Queen's Counsel
s and 15 other barrister
s, successfully established that the contractual terms were not penal, because the charge was not consequent on any breach of contract by a customer. The remaining question was then whether the charges fell foul of the Unfair Contract Terms Act 1977
(particularly s 6(2)) or the UTCCR.
Much was made by the banks of the clear, intelligible language used in the clauses in question. The judgment concluded that the language used was clear and intelligible in the contracts of HSBC, Lloyds TSB, Nationwide and RBSG; and similarly in the most part for Abbey National, Barclays, Clydesdale and HBOS although lacking in minor detail. It is unlikely that the relevant consumer protection law will be stifled by the conclusion of clear and intelligible language.
The banks attempted to establish that the statute is inapplicable to the charges in question. The essence of the argument submitted was that the charges are remuneration for the service provided by the bank (supplying a bank account) and so these particular contractual terms are not severable from the contract
as a whole. This argument was rejected by the High Court
.
The practical impact of this case is that customers can begin or continue claims against their banks and the lower courts will follow Office of Fair Trading v Abbey National plc and Others and assess the fairness of the clauses.
On penalties, Andrew Smith J said the following,
The banks appealed.
(now the United Kingdom Supreme Court) for permission to appeal on 25 March 2009, granted on 31 March. and the Banks entered their Appeal Petition on 6th April 2009. After a hearing on 23-25 June 2009, by Lord Phillips of Worth Matravers, Lord Walker of Gestingthorpe, Baroness Hale of Richmond, Lord Mance, Lord Neuberger of Abbotsbury, judgment was handed down by the Supreme Court at 9.45am on Wednesday 25th November 2009, with the Law Lords finding unanimously in favour of the banks. They held that the bank charges were a core term of the contracts for bank accounts, relating to the banks' remuneration. Therefore under the authority by the OFT
to assess the fairness of terms under UTCCR 1999 r 6(2), the unplanned overdraft were not capable of assessment. This means that even if one considered the terms unfair, the Supreme Court's view was that they could do nothing under the powers given to them by the legislation.
Lord Mance stated the following in his decision.
Bank Charges
The term bank charge covers all charges and fees made by a bank to their customers. In common parlance, the term often relates to charges in respect of personal current accounts or checking account...
in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, concerning the situation where a bank account holder goes into unauthorised overdraft.
When a bank customer makes a payment request (whether by standing order, direct debit or using an ATM or debit card), banks generally make the payment as requested, and then charge fees (which may include "paid item" charges and unauthorised overdraft fees) which accrue on a daily basis whilst the unauthorised overdraft continues. The Office of Fair Trading
Office of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
('OFT'), acting on behalf of consumers, challenged these fees under the Unfair Terms in Consumer Contracts Regulations 1999
Unfair Terms in Consumer Contracts Regulations 1999
The Unfair Terms in Consumer Contracts Regulations 1999 is a UK statutory instrument, which implements the EU Unfair Consumer Contract Terms Directive into domestic law.Implemented under the European Communities Act 1972. See also, L95 OJ 29...
('UTCCR'), which implements European Union Unfair Contract Terms Directive. OFT claimed the sizeable fees charged were not a fair reflection of the banks' costs but were instead a penalty upon the consumer or bank account holder, hence unlawful. If these fees were confirmed to be a penalty for breach of contract then under UK law the amount that could be charged would be limited to reflect the actual (and considerably lower) costs which were incurred by the bank.
The High Court held that although the charges were not penal, they fell within the remit of the legislation and hence their fairness could be assessed by the OFT. The Court of Appeal agreed and held unanimously and emphatically that the charges could be assessed for fairness. But the UK Supreme Court reversed this decision, holding that the charges could not be assessed for fairness by the OFT
Office of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
, or the courts. They held that UTCCR 1999 r 6(2), as the United Kingdom chose to implement the European Directive, precluded any assessment of the "core terms" of a contract, and because overdraft fees related to a bank's remuneration, the fees charged to consumers could not be challenged. Baroness Hale asserted that while the court had no power to do anything, Parliament could have chosen to construe the directive more broadly, and it would be up to the legislature to decide differently. The Supreme Court denied any reference to the European Court of Justice
European Court of Justice
The Court can sit in plenary session, as a Grand Chamber of 13 judges, or in chambers of three or five judges. Plenary sitting are now very rare, and the court mostly sits in chambers of three or five judges...
(through art 234 TEC), so bringing to an end the litigation. The regulations could be challenged as failing to implement the directive through a separate case, but since any decision by the ECJ would be prospective only the government, and not the banks, would have to pay any compensation. This may be unlikely, since the Directive gives a discretion to member states to regulate all terms or non-core terms.
Facts
Abbey NationalAbbey National
Abbey National plc was a UK-based bank and former building society, which latterly traded under the Abbey brand name. It became a wholly owned subsidiary of Grupo Santander of Spain in 2004, and was rebranded as Santander in January 2010, forming Santander UK along with the savings business of the...
, Barclays Bank, Clydesdale Bank
Clydesdale Bank
Clydesdale Bank is a commercial bank in Scotland, a subsidiary of the National Australia Bank Group. In Scotland, Clydesdale Bank is the third largest clearing bank, although it also retains a branch network in London and the north of England...
, HBOS
HBOS
HBOS plc is a banking and insurance company in the United Kingdom, a wholly owned subsidiary of the Lloyds Banking Group having been taken over in January 2009...
, HSBC Bank
HSBC Bank (Europe)
HSBC Bank plc is one of the four major clearing banks in the United Kingdom and is a wholly owned subsidiary of HSBC Holdings. The business ranges from the traditional High Street roles of personal finance and commercial banking, to private banking, consumer finance as well as corporate and...
, Lloyds TSB
Lloyds TSB
Lloyds TSB Bank Plc is a retail bank in the United Kingdom. It was established in 1995 by the merger of Lloyds Bank, established in Birmingham, England in 1765 and traditionally considered one of the Big Four clearing banks, with the TSB Group which traces its origins to 1810...
, Nationwide Building Society
Nationwide Building Society
Nationwide Building Society is a British building society, and is the largest in the world. It has its headquarters in Swindon, England, and maintains significant administration centres in Bournemouth and Northampton...
and the Royal Bank of Scotland
Royal Bank of Scotland
The Royal Bank of Scotland Group is a British banking and insurance holding company in which the UK Government holds an 84% stake. This stake is held and managed through UK Financial Investments Limited, whose voting rights are limited to 75% in order for the bank to retain its listing on the...
asked for declarations that their standard terms for charging customers were incapable of being penalties at common law. The OFT investigated charges where bank customers requested or instructed a bank to make a payment for which they had no necessary funds and was beyond an overdraft. The OFT argued that the breach of contract was not going into overdraft, but the customer telling his bank to go into overdraft. The bank argued that using a card without funds was a breach and therefore the charge was not penal.
The case was sparked initially by the request of Stephen Hone, a law student from Plymouth, England, for a refund of charges by Abbey
Abbey (bank)
Abbey National plc was a UK-based bank and former building society, which latterly traded under the Abbey brand name. It became a wholly owned subsidiary of Grupo Santander of Spain in 2004, and was rebranded as Santander in January 2010, forming Santander UK along with the savings business of the...
. He argued that under the UTCCR, all penalty charges had to truly reflect the cost of administering them. Hone believed that penalty charges which are higher than their administrative costs are illegal. After filing in small claims court against Abbey, Hone eventually recovered £5000 from the bank, although his original claim was for £840. The banks then sought a declaration that their charges for exceeding overdraft limits were not penalty clauses.
High Court
Andrew Smith J granted declarations for the banks. His ruling applied to "[u]npaid item charges, paid item charges, overdraft excess charges, and guaranteed paid item charges"The banks, engaging 9 Queen's Counsel
Queen's Counsel
Queen's Counsel , known as King's Counsel during the reign of a male sovereign, are lawyers appointed by letters patent to be one of Her [or His] Majesty's Counsel learned in the law...
s and 15 other barrister
Barrister
A barrister is a member of one of the two classes of lawyer found in many common law jurisdictions with split legal professions. Barristers specialise in courtroom advocacy, drafting legal pleadings and giving expert legal opinions...
s, successfully established that the contractual terms were not penal, because the charge was not consequent on any breach of contract by a customer. The remaining question was then whether the charges fell foul of the Unfair Contract Terms Act 1977
Unfair Contract Terms Act 1977
The Unfair Contract Terms Act 1977 is an Act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. It extends to nearly all forms of contract and one of its most important functions is limiting the applicability of...
(particularly s 6(2)) or the UTCCR.
Much was made by the banks of the clear, intelligible language used in the clauses in question. The judgment concluded that the language used was clear and intelligible in the contracts of HSBC, Lloyds TSB, Nationwide and RBSG; and similarly in the most part for Abbey National, Barclays, Clydesdale and HBOS although lacking in minor detail. It is unlikely that the relevant consumer protection law will be stifled by the conclusion of clear and intelligible language.
The banks attempted to establish that the statute is inapplicable to the charges in question. The essence of the argument submitted was that the charges are remuneration for the service provided by the bank (supplying a bank account) and so these particular contractual terms are not severable from the contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
as a whole. This argument was rejected by the High Court
High Court of Justice
The High Court of Justice is, together with the Court of Appeal and the Crown Court, one of the Senior Courts of England and Wales...
.
The practical impact of this case is that customers can begin or continue claims against their banks and the lower courts will follow Office of Fair Trading v Abbey National plc and Others and assess the fairness of the clauses.
On penalties, Andrew Smith J said the following,
The banks appealed.
Court of Appeal
After submissions on the 8 October and 5 November 2008, a combined decision of Sir Anthony Clarke, Waller LJ and Lloyd LJ held emphatically that the OFT had the jurisdiction to assess the fairness of the banks' unplanned overdraft fees. It denied leave to appeal to the House of Lords.Supreme Court
The Banks petitioned the House of LordsHouse of Lords
The House of Lords is the upper house of the Parliament of the United Kingdom. Like the House of Commons, it meets in the Palace of Westminster....
(now the United Kingdom Supreme Court) for permission to appeal on 25 March 2009, granted on 31 March. and the Banks entered their Appeal Petition on 6th April 2009. After a hearing on 23-25 June 2009, by Lord Phillips of Worth Matravers, Lord Walker of Gestingthorpe, Baroness Hale of Richmond, Lord Mance, Lord Neuberger of Abbotsbury, judgment was handed down by the Supreme Court at 9.45am on Wednesday 25th November 2009, with the Law Lords finding unanimously in favour of the banks. They held that the bank charges were a core term of the contracts for bank accounts, relating to the banks' remuneration. Therefore under the authority by the OFT
Office of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
to assess the fairness of terms under UTCCR 1999 r 6(2), the unplanned overdraft were not capable of assessment. This means that even if one considered the terms unfair, the Supreme Court's view was that they could do nothing under the powers given to them by the legislation.
Lord Mance stated the following in his decision.
See also
- Unfair Contract Terms Act 1977Unfair Contract Terms Act 1977The Unfair Contract Terms Act 1977 is an Act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. It extends to nearly all forms of contract and one of its most important functions is limiting the applicability of...
- Unfair Terms in Consumer Contracts Regulations 1999Unfair Terms in Consumer Contracts Regulations 1999The Unfair Terms in Consumer Contracts Regulations 1999 is a UK statutory instrument, which implements the EU Unfair Consumer Contract Terms Directive into domestic law.Implemented under the European Communities Act 1972. See also, L95 OJ 29...
- Bank ChargesBank ChargesThe term bank charge covers all charges and fees made by a bank to their customers. In common parlance, the term often relates to charges in respect of personal current accounts or checking account...
- Interfoto v Stiletto [1989] QB 433
- Director General of Fair Trading v First National Bank plcDirector General of Fair Trading v First National Bank plcDirector General of Fair Trading v First National Bank plc [2001] is the leading case on the Unfair Terms in Consumer Contracts Regulations 1999. It was an action to test the fairness of clauses in loan agreements which secured a bank commercial interest rates after a debtor that had defaulted and...
[2001] UKHL 52 - Bairstow Eves London Central Ltd v Smith [2004] EWHC 263, Gross J, "regulation 6(2) must be given a restrictive interpretation; otherwise a coach and horses could be driven through the Regulations."
External links
- Information page from the Financial Services AuthorityFinancial Services AuthorityThe Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
, giving clear guidance for consumers - 'Bank charges can be assessed for fairness' (April 29, 2008) The TimesThe TimesThe Times is a British daily national newspaper, first published in London in 1785 under the title The Daily Universal Register . The Times and its sister paper The Sunday Times are published by Times Newspapers Limited, a subsidiary since 1981 of News International...
- 'Banks lose overdraft charges case' (April 24, 2008) BBC News