The Office of Fair Trading v Abbey National Plc and 7 Others

Hearing dates: 17, 18, 21, 22, 23, 24, 28, 29, 30, 31 January and 4, 5, 6, 8, February 2008

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Introduction

This action is about charges made by banks to their customers who have personal current accounts with them when they are requested or instructed to make a payment for which they do not hold the necessary funds in the account and which is not covered by a facility arranged with the customer. I shall refer to such requests or instructions as “Relevant Instructions”, and to the charges as “Relevant Charges”. I shall refer to the terms in the standard form contracts between bank and customer providing for the Relevant Charges as “Relevant Terms”.

The Relevant Terms and Relevant Charges are being challenged on two fronts: the Office of Fair Trading (the “OFT”) is investigating under the Unfair Terms in Consumer Contracts Regulations 1999 (the “1999 Regulations”) the fairness of the terms under which banks make such charges, and cases have been brought by individual customers in county courts disputing charges levied by banks, many of them relying not only on the 1999 Regulations but also on common law rules about the unenforceability of penalties.

The claimant in these proceedings is the OFT. It is a “general enforcer” under section 213(1) of the Enterprise Act 2002, and therefore entitled under section 215(2) of the Act to apply for an enforcement order in respect of a domestic or a Community infringement (a Community infringement being an act or omission which harms the collective interests of consumers and which inter alia contravenes a listed Directive as given effect by the laws, regulations or administrative process of a state belonging to the European Economic Area), and specifically the Office of Fair Trading has a duty under the 1999 Regulations (subject to irrelevant exceptions) to consider any complaint made to it that any contract terms drawn up for general use are unfair. In March 2007 the OFT announced that it was to conduct “a formal investigation into the fairness of bank current account charges”, and is considering whether to exercise its function under the 2002 Act to seek an enforcement order. It is perhaps worth emphasising that the OFT has not reached any conclusions about the fairness of the Relevant Charges or other matters that it is investigating. Mr Cavendish Elithorn, the OFT's Senior Director of Service Sectors, explained in his evidence that among the questions that the OFT is considering and wishes to continue to consider are (i) whether the Relevant Charges are sufficiently transparent and predictable for consumers; (ii) whether the Relevant Charges are too high; and (iii) whether the Relevant Charges operate fairly in relation to the individual customer (given that, as Mr. Elithorn says, the charges are borne by a minority of customers and bear no relationship to the costs of providing corresponding overdrafts but support the profitability of the current account service generally). He emphasises that the OFT is not only looking at the amount of the Relevant Charges, but at how they apply, how they are presented to the individual customer and their impact on customers. The objection has been raised that the Relevant Charges are not subject to assessment under the 1999 Regulations.

These proceedings are against seven companies who, themselves or through one or more subsidiaries, operate banks and against the Nationwide Building Society, a mutual building society. I shall refer to the eight defendants simply as “the Banks”. They represent, I was told, nine of the twelve members of the Cheque and Credit Clearing Company, and all operate large numbers of personal current accounts. Clydesdale, who, I understand, has the smallest share of the market, has some 2.4 million personal customers in the United Kingdom.

The proceedings were brought on 27 July 2007 after the OFT and seven of the Banks had made a Litigation Agreement dated 25 July 2007, to which the Financial Services Authority (“FSA”) was also party, and The Royal Bank of Scotland Group plc (“RBSG”) had made a separate but similar agreement with the OFT and the FSA on 26 July 2007. The recitals to the Litigation Agreement refer to the OFT's investigation into “certain terms contained in each Bank's personal current account arrangements providing for charges to be imposed upon customers who seek to make payments for which they do not have available funds”, and the proceedings brought by customers against the Banks. They go on to record the belief of the OFT and the Banks that the legal issues that have been raised in relation to the Banks' terms need to be resolved expeditiously and in a fair and orderly way, and to express concern about the scale of the litigation brought by customers. The OFT recognises the “desirability of achieving a fair and orderly resolution of the relevant issues” and agrees not to object to any request or application for a stay of other court proceedings between the Banks and their customers about the charges made by banks. I understand that, at least for the most part, the customers' litigation has not been proceeding pending the determination of issues raised in these proceedings.

The OFT identifies four basic categories of Relevant Charges about which it is concerned: Unpaid Item Charges; Paid Item Charges; Overdraft Excess Charges; and Guaranteed Paid Item Charges. An Unpaid Item Charge is, as the OFT pleads, “levied when the customer gives an instruction for payment or, in some cases at least, withdrawal, that the bank declines to honour because the customer does not have sufficient funds in his account” or, I would add here and in relation to other charges, an arranged facility which covers it. A Paid Item Charge is “levied when the customer gives an instruction for payment or, in some cases at least, withdrawal, for which he has insufficient funds in his account and which the bank honours”. An Overdraft Excess Charge is “levied if, during a specified period (typically a day or a month) … an account is and/or goes overdrawn (and there is no overdraft facility), or… the debit balance is and/or goes above the limit on an existing overdraft facility, and in both cases irrespective of the reason why the excess has occurred”. A Guaranteed Paid Item Charge refers to a charge distinct from a Paid Item Charge which some of the Banks levy when they honour “in accordance with the guarantee, a cheque issued in conjunction with a cheque guarantee card (or, in the case of some banks, a debit card payment made under a guaranteed debit payment system) for which the customer does not have sufficient funds”.

The relief that the OFT seeks in these proceedings is directed to establishing whether the investigation falls within the ambit of the 1999 Regulations. Specifically, it seeks a declaration that

“the Relevant Terms and Charges in Current Agreements (and to the extent relied on by the banks, in Historical Agreements) are not excluded from an assessment for fairness under the 1999 Regulations by reason of Regulation 6(2)(a) and/or (b) thereof: …”

The focus of the OFT's concern is upon the Banks' current agreements, the standard form terms that the Banks now use when a customer opens an account with them and that they have introduced into their contracts with existing customers.

The Banks bring counterclaims in the proceedings which (i) are directed not only to current terms but also to standard form terms which they have used in the past, “historical terms” as they have been called; (ii) are directed not only to the application and effect of the 1999 Regulations but also to whether their (current and historical) terms include penalties and so to that extent are unenforceable at common law; and (iii) are concerned with the proper approach to the assessment contemplated by the 1999 Regulations of whether a term is to be regarded as unfair and in particular the reference in Regulation 5(1) to a term being “contrary to the requirement of good faith”. The Banks hope that these proceedings might not only determine whether the OFT's investigation is proper but also provide guidance about the law applicable to the claims brought by individual customers.

The 1999 Regulations

The 1999 Regulations were made under section 2(2) of the European Communities Act 1972. Their purpose...