In July 2007, following a growing number of claims by bank customers for a refund of unfair bank charges, the Office of Fair Trading (OFT) agreed to a test case in the High Court involving seven major banks and one building society.

The case is due to start on January 14, 2008 and is expected to last 8-14 days.

The case will decide whether bank charges for unauthorized overdrafts and returned item fees are lawful or not under the Unfair Terms in Consumer Contract Regulations 1999 (UTCCR). The OFT has already indicated that it considers the legal test of unfairness applies to such charges.

Unsurprisingly, the banks do not agree. Hence the OFT is seeking to establish this legal principle in the High Court. By seeking clarification of this, The OFT believes this will help speed up a resolution to the whole issue of charges.

The case follows on from the separate issue of credit card charges which the OFT has already stated were unfair and too high.

The High Court case is the first step in a review by the OFT into whether UK current accounts provide value to the customer. The wider implications concerning value for money and competition form part of a market study by the OFT. This study is looking at such issues as:

• transparency of costs to consumers

• ease of switching

Which banks are involved in the test case?

The 8 financial institutions involved in the High Court test case represent 90% of the personal current account market and are:

• Abbey National 

• Barclays Bank 

• Clydesdale Bank 

• HBOS (includes Halifax and Bank of Scotland)

• HSBC Bank

• Lloyds TSB Bank

• Royal Bank of Scotland Group (includes NatWest)

• Nationwide Building Society

What does the test case cover?

The test case is to decide whether the charges are subject to the test of fairness. That is it will determine if the UTCCR can be applied to bank charges.

This first stage of legal action is also covering some additional points of legal principle, in particular whether these charges can be a penalty at common law.

What happens after the test case?

Assuming the ruling is that the UTCCR can be applied to bank charges, the next step will then be to consider if the amount of charges is unfair.

Based on the OFT findings concerning credit cards, it is very likely that will say they are unfair. The OFT will then talk with the banks about what they are willing to do. If no agreement is reached the matter will be referred back to the courts.

How is the test case structured?

The OFT has established an agreement with the 8 financial organisations involved to ensure the case is conducted properly.

All the banks have agreed to provide documents and information required by the OFT quickly. Each party will also pay its own costs.

Does the test case affect claims already being processed or people wanting to claim?

The OFT test case does not affect claims that are already being processed nor customers still wishing to claim.

The Financial Services Authority has agreed that the banks can suspend work on all claims, known as the ‘Waiver'. This means that for one year or until the test case is resolved, any bank or building society that complies with the conditions of the Waiver will not be required to handle complaints relating to unauthorised overdraft charges within the normal time periods.

Courts may also ‘stay' (postpone) individual claims made to them.

The Financial Ombudsman Service has also decided to stop progressing claims made until the legal outcome is known.

Can the banks still levy charges until the OFT's action is resolved?

The OFT has said that until their investigation into the fairness of the current levels of charges is completed, it would not be appropriate to ask banks to make changes to their charging structure at the moment.

The OFT is working closely with the Financial Services Authority (FSA) and the Financial Ombudsman Service (FOS), who are responsible for handling complaints in the banking industry, to ensure that the test case process is as well co-ordinated as possible and that consumers will not be disadvantaged. The FSA has also not intervened in the levying of the charges themselves at least until the outcome of the test case is known. However, it has set strict conditions on the Waiver that banks must follow, designed to ensure that consumers' ability to recoup charges levied prior to or during the test case will be unaffected.

Is the OFT concerned about County Courts staying individual consumers' claims pending the test case?

The OFT have said that it is not for them to say how the courts should handle claims in the light of the test case and the Waiver.

After the test case, when will the OFT say what level of charges is fair and enforce this?

Alongside the test case, the OFT is continuing its market study into the UK Current Account market. If the conclusion is that the charges are unfair then the OFT will take the steps it considers necessary to enforce its view.

The banks will be given the opportunity to co-operate voluntarily. If they do not then the OFT will take enforcement action.

Does voluntary cooperation mean the OFT and banks will do a ‘secret' deal?

The OFT has said that if the issue can be resolved without the need for further, probably lengthy, court action then this is in the best interests of bank customers.

The OFT can bring an injunction or enforcement order under the Enterprise Act 2002. However, it must consult with the banks to avoid, if at all possible, the need for further court proceedings.

Reference:

www.oft.gov.uk/advice_and_resources/resource_base/market-studies/personal2