The Supreme Court of the United Kingdom last week ruled that bank charges on unauthorised overdrafts cannot be challenged on price.
This Brief Counsel discusses the case and the possible implications for New Zealand.
The UK Office of Fair Trading (OFT) has been engaged in two parallel projects concerning personal current accounts (PCAs):
a market study into whether the PCA market is working well for consumers, and
an investigation into whether banks’ terms and charges for PCAs contravene the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations).
As a result of publicity around the Regulations project, UK banks faced a large number of small claims from customers claiming that the overdraft facility fees were unlawful.
The Regulations provide that the standard terms on which businesses deal with consumers must not be unfair. A term is “unfair” if it causes a significant imbalance in the parties’ rights and obligations under the contract, to the detriment of consumers. There is an exception for those terms which relate to the definition of the main subject matter of the contract, or that relate to the adequacy of the price or remuneration for the goods or services which are supplied. The OFT has the power to apply for an injunction to prevent a business from including unfair terms in consumer contracts.
The major banks entered into a litigation agreement with the OFT under which the OFT sought declarations from the High Court as to whether the terms of the consumer contract which imposed the charges were subject to the fairness requirement.
Consideration of the plethora of small claims was stayed pending resolution of these issues.
After both the UK High Court and UK Court of Appeal upheld the OFT’s position, the banks appealed to the House of Lords (now Supreme Court) in Office of Fair Trading v Abbey National plc & Others  UKSC 6 over the preliminary jurisdictional issue of whether the charges imposed by banks for unarranged overdrafts were subject to the fairness requirement in the Regulations.
The Supreme Court decision
The Supreme Court found that the overdraft charges could not be challenged on the basis that they were excessive, although could be challenged as unfair on other grounds. The Court held in emphatic terms that “bank charges levied on personal current account customers in respect of unauthorised overdrafts (including unpaid item charges and other related charges) constitute part of the price of remuneration for the banking services provided.”
This is a major blow for the OFT.
The Court’s analysis was that the services offered by banks to their current account customers are a composite package comprising not only any overdraft facility (whether authorised or unauthorised) but also the collection and payment of cheques, other money transmission services, facilities for cash distribution, and the provision of statements.
Similarly, on the other side of the ledger, the banks’ remuneration was a composite made up of the interest forgone by customers in credit, overdraft interest for those not in credit and other charges for services provided. Overdraft facility charges were a significant component of that remuneration.
It followed that the overdraft charges related to the adequacy of price or remuneration for the services supplied (within the meaning of Regulation 6(2)(b)) and so were excluded from the fairness assessment. Furthermore, the fact that the overdraft charges were contingent (in the sense that they were not incurred by all customers) was irrelevant.
“The banks may not be the most popular institutions in the country at present, but that does not mean that their methods of charging for retail banking services are necessarily unfair when viewed as a whole”. (Lady Hale, UK Supreme Court)
Relevance for New Zealand
The UK finding reflects a pragmatic and commercially robust interpretation of the way banks provide current account services to customers and price for those services. This contrasts with the disaggregated approach favoured by our Commerce Commission, which involves breaking down the constituent parts of the PCA service.
The New Zealand regime is different to the UK Regulations in that it refers expressly to “default fees” and “credit fees” and so may invite more of a focus on the fee itself rather than the overall service provided. However, an equally important factor to which a court must have regard is “reasonable standards of commercial practice.”
The Supreme Court’s decision invites increased reliance on an argument that reasonable standards of commercial practice in retail banking mean that overdraft facility fees are simply part of payment for the global package of services the bank provides and, as such, should be assessed in the aggregate.
Unfortunately for the New Zealand financial sector, this legislation is very difficult to interpret so whether the Abbey National argument can succeed here is unclear. While litigation is always an unattractive option, if the opportunity for some form of pre emptive declaratory judgement did present itself here (as it did in the UK) that could be very useful.