Page last updated at 16:34 GMT, Tuesday, 29 January 2008

OFT accuses banks over charges

By Ian Pollock
Personal finance reporter, BBC News

Brian Doctor QC
Brian Doctor QC is representing the Office of Fair Trading

Banks use a "strange language" to pretend their overdraft charges are fair, the High Court has been told.

Brian Doctor QC, for the Office of Fair Trading (OFT), said the language of bank contracts did not reflect "objective reality".

He was addressing the court on the eighth day of a key test case to decide whether the OFT can rule on the validity of overdraft charges.

Seven banks and the Nationwide Building Society deny their charges are unfair.

They agreed to the test case to clarify their legal position after a mass of litigation, which has seen hundreds of thousands of consumers claim refunds totalling hundreds of millions of pounds.

'Strange world'

Barristers for the lenders have told the judge hearing the case, Mr Justice Andrew Smith, that current account customers get a package of services for which they are charged a package of prices.

But Mr Doctor accused the banks' QCs of trying to "cast a spell" over the court.

"We are entering a strange world in which the banks speak a strange language, in which customers are deemed to have done one thing by doing another," he said.

Mr Doctor argued that some banks have, in the past year, been rewriting their contracts for running a current account to avoid any application of the 1999 unfair terms in consumer contracts regulations.

These charges are not prices in ordinary language - they are not services as normally understood
Brian Doctor QC
These regulations would allow the OFT to rule on the fairness of overdraft charges, as long as the charges are not fees for a service provided under the core terms of the contract.

The banks maintain their charges are indeed levied in return for a service, the provision of which is fundamental to the operation of current accounts, and therefore the regulations are not relevant.

But Mr Doctor told the court that the charges were "highly unusual, both in their contractual form and the way they operate".

As such, he argued, they could be investigated under the consumer contract regulations.

"These charges are not prices in ordinary language - they are not services as normally understood."

"The charges are not in exchange for these services," he added.

'Colourful analogies'

Mr Doctor took a swipe at the arguments that have been put forward by the banks' QCs.

Describing them as some of the finest minds at the bar, he said they had failed to illuminate the issues, despite putting forward a series of colourful analogies.

These had attempted to draw comparisons between charges for bank overdrafts and charges for night clubs, hotel rooms, builders, shoe shops, mobile phones, car salesmen and university admissions.

But Mr Doctor said that these were not accurate comparisons because in reality there are no analogies for bank overdraft charges.

Earlier in the proceedings, Mr Laurence Rabinowitz QC accused the OFT of prompting a deluge of litigation against the banks in the county courts by making what he described as "ill-judged comments" about the applicability of its ruling on credit card charges to bank charges.

Mr Doctor rejected this criticism.

Barclays - 87m
HSBC - 116m
HBOS - 79m
Lloyds TSB - 36m
RBS - 81m
Source: Bank interim results

He said complaints to the OFT about overdraft charges had started well before the OFT's credit card ruling was published in 2006.

"The deluge of claims is due to the fact that the banks have been refunding the claims," he said.

"Yet there have been no judgements or court orders telling them to do so."

Mr Doctor went on to quote a report on the BBC news website pointing out that the sums being reclaimed were enormous, running into hundreds of millions of pounds.

Continuing investigation

However, Mr Doctor stressed to the judge that so far the OFT had not come to a conclusion as to whether bank overdraft charges were unfair or not.

He told the court it was the OFT's duty to investigate complaints about unfair contracts and that was what the regulator was doing.

But he said the OFT was still in the middle of investigating the subject, adding that, "in these proceedings, there is no consideration of whether the charges are fair or unfair".

"We have decided nothing; we are investigating complaints; the OFT has not attacked anything yet," he said.

Mr Doctor spent much of the afternoon analysing the importance of a House of Lords ruling in 2002 in which the OFT had challenged penalty charges imposed by First National Bank.

"This provides many of the answers we urge you to take up", he told the court.

Mr Doctor argued that the lesson to be drawn from the case was that charges made for an unauthorised overdraft were "not a central feature of the bargain".

In a taste of things to come, he cited a leaflet published by Lloyds TSB entitled "Avoid slipping into the red". He described the leaflet as equating going into the red with a kind of shipwreck.

"This could hardly be the main subject of the contract," he argued

"Why would one be urged to avoid the main subject of the contract?" he asked.


The hearing continues and is now expected to last until at least the end of next week, to allow the banks and Nationwide to respond to Mr Doctor's arguments.

It had originally been scheduled for eight days.

The outcome of the long-awaited court case could bring a significant change to the UK current account market.

If the OFT argument is upheld, it could mean banks and building societies having to return billions of pounds collected from customers over the past six years.

However, the losing side is expected to appeal, possibly all the way to the House of Lords, meaning the issue may not be resolved until next year.

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