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The Test Case: where it all went wrong

The way that the OFT handled this whole issue of penalty bank charges can be explained either as a cock-up or a conspiracy. In the cock-up theory, the OFT was determined to sort out the scandal of penalty bank charges but made mistakes in the whole process of how it set up the test case with the banks, how it allowed the banks to run rings around it through the whole process and was unfortunate to come up against a rogue decision from the Supreme Court at the end of the process. With the conspiracy theory, the OFT never really wanted to win this case – it was under pressure from the government because of the parlous state of the banking industry and the government had decided that it could not afford for the banks to lose; so the OFT made deliberate tactical mistakes thoughout the process.

Which of the theories is true? I suspect that it is a combination of the two. The OFT's heart was not really in this case, it was under pressure from the government to go easy on the banks but it did its best, but its best was not good enough.

If anyone had set out in 2007 to make sure that the test case was handled as badly as possible, they probably would have done exactly what the OFT did. Consider all the mistakes that the OFT made.

First, why was the test case announced out of the blue in July 2007? The OFT had been alerted to the issue of unauthorised overdraft charges and how unfair they were as early as 2005 when I and other campaigners started taking up the issue. At the time, the OFT was tackling the banks over the related issue of penalty charges on credit cards. The OFT told me and others that they would deal with current account default charges once the credit card charges issue had been successfully resolved. They gave the impression that they thought that current accounts could be sorted out fairly simply after the principles were established with credit cards.

However, the OFT did not sort out the principles with credit cards. Instead they reached a grubby compromise with the banks in the summer of 2006 whereby they agreed to lower their default charges from a typical level of £25 per incident to no more than £12. In return, the OFT would take no further action against them on this. Therefore, the legal principle was left hanging.

The OFT then slowly started to look at current account charges. Meanwhile, I and other campaigners were becoming increasingly successful in recovering unauthorised overdraft charges from banks by the simple expedient of issuing County Court summonses. Almost invariably, the banks rolled over and paid up without arguing the case in court. By the end of 2006, the banks had probably paid out several million pounds to claimants. But this was small beer compared with the profit that the banks were making from these charges, estimated to be between 3 and 5 billion pounds per annum.

Then, in the first half of 2007, the scale of payouts from the banks exploded and in 6 months the banks paid out in total about £700 million. At this level, these amounts had to be reported in the banks' half yearly figures to the Stock Exchange. Suddenly, the cat was out of the bag and it is likely that the scale of payouts in the second half of 2007 would have been even more. This was becoming a serious issue for the banks and action had to be taken to stem the flow.

I believe that the test case was, therefore, initiated by the banks and not by the OFT. If you ask them who initiated it, you get a very fudged answer. Interestingly, Royal Bank of Scotland did not seem to agree with the other major banks about the need for the test case and they signed up to it a day after the other 7 banks did and Sir Fred Goodwin (yes, that man again) was quoted in the press as saying he did not think it was necessary. See Banker of the Week story about this.

The terms of the agreement to fight the test case looked as though they had been put together hastily. The first mistake that the OFT made was to allow the banks to throw into the equation the issue of common law penalties. This issue is crucial for business account customers who are not protected by the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR). The banks wanted it in so that they could get a declaration which would suit them in respect of business accounts. The OFT has no duty or remit to consider this issue but they allowed it to be put into the case. Then to cap this, within a few weeks, a senior OFT spokesman essentially surrendered on the common law penalties issue before the case was anywhere near the court. See test case update Sept 2007.

The next bizarre aspect of the test case was that it was agreed between the OFT and the banks that the first batch of bank terms that would be considered by the High Court judge to see whether or not they were subject to the test of fairness in the UTCCRs would be the new terms that the banks had produced after they had started paying out on claims against them. These were terms that had been written specifically by the banks' lawyers to try to make out that the unauthorised overdraft charges and similar penalty charges were all part and parcel of the normal terms rather than their being default charges. Some of these new terms had not even been written by the time the test case agreement was drawn up in July 2007. They were written after this date and then presented to the judge for consideration. Only when the judge had considered the new terms would he go back and look at what were now being called historical terms. This seemed bizarre because most of the claims in the Court system which were on hold related to the historical terms. Since the test case was supposed to bring "clarity" to the issue, why was the case concentrating first on terms which had not been involved in the claims on hold? Of course, the way these terms were being considered suited the banks. The new terms were more likely to be OK and once this was established, it would set the mood for what would then look like more of an academic exercise on the historical terms.

The test case came before the High Court Judge in January 2008. In April, he announced his first judgment on the new terms. This was essentially a score draw between the OFT and the banks. The banks got what they wanted on the common law penalties with Justice Smith saying that they were not penalties. On the UTCCRs, he found that they were subject to the test of fairness but that they were not default charges. This meant that the level of charge would have to be agreed between the OFT and the banks.

Then in October, the judge found similarly in respect of historical terms. To be frank, this was a nonsense. It is clear that in some of the banks' historical terms had express clauses that said that going overdrawn without agreement constituted a breach of contract. This means that it is a virtually cast iron certainty that they would be subject to the common law rules on penalties. But Justice Smith just ignored that and gave a ruling that suited the banks.

The banks appealed against the rulings on UTCCRs but the OFT did not appeal against the ruling on common law penalties.

It should be noted that the whole case was argued in court between barristers for both sides without any witnesses being called such as individuals who had been crucified by bank charges nor even high street bank managers who had to deal with customers and who could have been cross examined about what they thought the relationship was between the bank and its customers. This would have produced a very different version from the tale that the banks' barristers spun about some hypothetical relationship. Given that this dispute is about how banks treat their customers, is it not strange that no customers were ever allowed to testify in court? If the OFT had not intervened and launched the test case, any case that had come to a contested court case would have had to consider the evidence of a real customer.

The Court of Appeal upheld the High Court judgment regarding UTCCRs. At this stage, it looked inevitable that the banks were going to lose this argument. Going to the House of Lords with the case looked just like further delaying tactics.

So on it went to the House of Lords and meanwhile all claims in the system remained on hold and the banks continued to plunder their customers' accounts at will.

By the time the House of Lords was due to give its ruling, it had been revamped to become the Supreme Court. And so, on 25 November 2009, the Supreme Court overturned all the previous judgments and essentially said that the banks could do what they liked. On 22 December, the OFT threw in the towel and said that they would not try any further legal challenge.

So what were the mistakes (deliberate or accidental) that the OFT made?

1. The OFT did not have to bring the test case at all. It could have stood back and allowed individual campaigners to continue to make claims. After all, we had achieved refunds of over £700 million with no help from the OFT. When the OFT launched the test case, the first thing that happened was that the good guys were disarmed.
2. If the OFT wanted to fight a test case, it could have picked off an individual bank rather than allow 8 banks to gang up against it. In the test case, the one OFT barrister was always faced with 8 opponents. So, the banks had a tremendous advantage in that they had 8 attempts at cross examining the OFT. And when presenting their own cases, they could watch each other and learn from each one before amending their own presentation accordingly. The OFT had only one shot on goal; the banks could take 8 attempts.
3. The OFT should not have allowed the banks to put into the test case the issue of common law penalties. The OFT had no remit to defend business account customers. So its heart was not in this.
4. Having agreed to have common law penalties in the test case, the OFT spokesman should not have sold his team short by stating publicly that he did not think that they would win that point.
5. The OFT should not have agreed that current terms were to be considered before historical terms. This played into the hands of the banks. If the arguments had been made on historical terms first, it would have been much easier to win the default charge argument on those; then the OFT could have successfully argued that the current terms were merely worded deliberately to disguise the true nature of the contract.
6. The OFT should certainly not have allowed banks to put to the High Court terms which had not even been written by the time the test case was announced.
7. The OFT should have called bank customers as witnesses and should have insisted on an actual bank manager being cross examined.
8. The OFT should have appealed the common law penalty argument and produced much more robust evidence from banks' historical terms and from letters written by banks that supported this argument.
9. The Supreme Court had suggested that there might be other grounds on which the OFT could challenge the banks. But, instead, the OFT unconditionally surrendered.

Overall, an abject performance by the OFT.

Published and promoted by Bob Egerton, TR2 4RS