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OFT Test Case

Decision announced Thursday 24 April

On 24 April, Justice Smith handed down his decision in the OFT/Banks test case.

When the decision on the test case was announced, my initial reaction was that it was good news and, armed with only the briefest of information from the announcement on the BBC website, I said in radio and TV interviews that it was a good result. I said that I looked forward to an early final resolution of this issue.

Having now had the time over the weekend to read the full judgment, the initial euphoria has definitely worn off.

My concerns are in two areas:

Personal current accounts

It is clear now that the OFT will have to finalise its view on the whole concept of the fairness of the charges made by the banks. Presumably, it will be a view that the level of charges should be reduced from their current levels. I strongly suspect that the level which the OFT will specify will be considerably higher than the cost to the banks of these transactions and that the banks will continue to make significant profits from these charges. Furthermore, I think that it is highly unlikely that either the OFT or the banks will go back to the Courts to get a ruling on the level of charge. It is far more likely that a deal will be struck between the OFT and the banks to avoid further court action. This was what happened with credit card default charges. The OFT came out with a figure of 12 and, after suitable huffing and puffing and protests, the banks apparently acceded to it without giving any formal undertakings. The OFT patted themselves on the back for what they described as an "innovative solution." As it happens, not all the banks acceded to it: Clydesdale Financial Services continued to charge 22.50 per incident until a few weeks ago and the OFT did nothing about it until I brought it to their attention in October 2007. It then took them nearly 6 months to get agreement from Clydesdale Financial Services (now part of Barclays) to reduce the fee to 12. In the case of Egg credit card, Egg continues to level a default charge of 16 per incident and the OFT resolutely refuses to do anything about it, merely alluding to "special circumstance". However, at least with credit cards, it is still possible for an individual claimant to take a credit card company to court and make a claim even against the default charge of 12; and the bank will (in my experience) refund the full amount of the charge. This is because the claimant can still use the law relating to penalties and to the Unfair Terms in Consumer Contract Regulations 1999 and the banks do not want to go to court to have the 12 figure contested.

However, in the case of current account claims, this ruling by Justice Smith has placed consumers in a much weaker position. The judge rejected the argument that the incidents giving rise to the disputed charges arose from breaches of contract by the customer. Therefore, the customer cannot now rely upon the common law rule on penalties, or the specific provision in the UTCCR, Schedule 2, para 1(e) "requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation." These provisions allowed a lay customer to argue in court that the fees should not be higher than figures that could be estimated/guesstimated from various published studies on the true cost to the banks of what happened when the customer failed to meet an obligation (estimates ranged from 50 pence to 4 maximum). Now, if the OFT reaches a deal with the banks whereby a maximum "penalty" charge is going to be, for example, 15, an individual will not be able to challenge that in a local court because there are no comparables against which the fairness of the charge will be able to be estimated. Any individual trying to claim back any charges that meet the OFT/banks agreed compromise is likely to get short shrift from the local judge.

So, what this judgment has essentially done is almost certainly to take the whole argument out of the courts and to leave it to a grubby back room deal between the OFT and the banks. This was foretold by a senior OFT spokesman (Cavendish Elithorn) as reported on the BBC website on 11 September 2007, "OFT may compromise on bank case". See http://news.bbc.co.uk/1/low/business/6989510.stm

Business bank accounts

This is where the result of the test case is very bad news for small businesses. Anyone with a business account does not enjoy the protection of the UTCCR because these apply only to consumers. A consumer is defined as "any natural person who, in contracts covered by these Regulations, is acting for purposes which are outside his trade, business or profession." Until this judgment, I have been regularly bringing claims for clients with business accounts against banks using the common law rules on penalties. These rules have been in existence for over 100 years and essentially have the same effect as that which would be effective if Schedule 2, para 1(e) of the Regulations was used, i.e. any charge imposed for a breach of contract must only reflect the loss incurred by the innocent party in the breach. In other words, the bank can only charge what it cost them to bounce a cheque or provide an unauthorised overdraft. No bank has been prepared to come to court and argue against me on these claims. In fact, I have had 5 claims paid up by banks in the past few months even though the local court had (wrongly) put the claims on stay.

Now, this decision by Justice Smith has said that the common law rules on penalties do not apply to the contracts which he considered in the test case. Although it may be possible to argue that the contractual terms in business accounts applicable when charges were imposed a few years ago were different, it will be a struggle to get a local county court judge to go into the claim in sufficient detail to differentiate between what those historical terms were and what Justice Smith was looking at when he made his decision. My experience of county court judges is that they are far more likely to take a simplistic approach of "The test case said that these terms are not common law penalties and therefore I am going to apply that to this case."

Even if it is still possible to win claims against banks on historical terms, this will be a short term phenomenon only because the banks now know exactly how they need to amend their business account terms to meet the criteria used by Justice Smith and ensure that they will not be caught in future.

The problem has arisen because the OFT allowed the banks to include reference to the common law rules in the test case when it should never have been part of the case. The OFT had no remit to consider these rules, the OFT had no remit to consider the implications on business accounts (they were only concerned with the consumer and the UTCCR), and, as a consequence, I believe that the OFT did not put forward any strong arguments about the common law rules - they were merely thrown in as a side issue. In fact, if you believe in conspiracies, it might even seem that the OFT were prepared to throw that part of the case in order to do a deal with the banks on personal accounts after the court decision. For evidence of this, you need look no further than the BBC article as above, where Mr Elithorn not only suggested that they might do a deal with the banks, but said that "In most instances we would probably agree with the banks' arguments that these are not penalties as defined in common law". This is before sending his team into battle supposedly to argue the opposite - not a statement that would have put much resolve into his troops on the front line. (I believe that it was possible to put forward much stronger arguments about the common law rules and with a reasonable prospect of success. It should be noted that, during the 3 week trial, not a single witness was put forward by either side to be cross examined about what they thought was the essence of a contract between a bank and a customer. The whole trial consisted of tedious arguments over issues such as whether clauses should be read conjunctively or disjunctively!)

So what conclusions can we draw from this?

Personal accounts will probably be sorted out with a compromise deal some time in the next few months, but at a higher level of charge than should be justified.

Business account holders can look forward to continuing misery and exploitation from the banks with no respite provided by either the courts or the OFT.

Which means that the only people who can now help small business are the legislators. There must be a strong argument for bringing in legislation specifically to outlaw this type of behaviour by banks. I will be lobbying MPs to see if anything can be done about this.

For BBC report on result, see BBC news

For OFT Q&A, see OFT website

For background on test case and other updates, see

OFT test case, update, test case Jan 08, test case starts, decision soon

For other news, see news stories

Published and promoted by Bob Egerton, TR2 4RS