Page last updated at 12:27 GMT, Friday, 23 January 2009

New NatWest bank charges ruling

By Ian Pollock
Personal finance reporter, BBC News

Mr Justice Andrew Smith
Mr Justice Smith ruled against NatWest on one point only

Some customers of the NatWest bank may have a new opportunity to reclaim their bank overdraft charges.

A High Court judge has ruled that the bank's terms and conditions, used from 2001 to July 2003, may have included unfair penalties for going overdrawn.

The ruling by Mr Justice Andrew Smith is one of a several in the long running test case on bank charges.

Most overdraft claims in county courts have been halted since July 2007 while the High Court resolves the issue.

"The court found that a single historic NatWest term prohibited customers from using a card to go overdrawn but this does not mean that that term is a penalty," said a NatWest spokesman.

New cases?

The consumers' organisation Which? said in theory some NatWest customers could now ask their courts to reopen their claims, but warned it would not be plain sailing.

"Firstly, the judge this week only said Natwest's 2001 charges may be penalties, not that they are penalties," said Which? lawyer, Chris Warner.

"This means the customer would need to show that the charges were actually penalties by proving that the charge did not reflect the bank's costs.

"Also, as the issue of charges reflecting the cost to the bank is part of the OFT's ongoing fairness assessment, Natwest may be able to convince the court to stay any cases brought against it until the OFT's investigation is complete," he added.

Marc Gander, of the Consumer Action Group (CAG), said some of his members were now thinking of returning to court, after being charged under the NatWest's 2001 conditions.

"It affects personal and business customers, but only for a limited period of time," he said.

"The bigger question is whether the contracts will be subject to the consumer contract regulations."

The ruling

The banking industry and the Office of Fair Trading (OFT) are waiting for the Appeal Court to hand down its judgement on a bank appeal against an earlier ruling by Mr Justice Smith.

I therefore remain unpersuaded that the relevant term in the NatWest 2001 conditions is not capable of being penal
Mr Justice Andrew Smith

Last year he dealt a blow to the right of banks to levy high overdraft charges when he decided that the 1999 regulations, regarding unfair terms in consumer contracts, gave the OFT the right to scrutinise those charges.

This week's judgement by Mr Justice Smith was one of three residual decisions, made on whether or not charges levied under old or "historic" terms and conditions could also be penalties under common law, and therefore not recoverable.

Last October he cleared most of the old contracts used by seven banks and the Nationwide building society, who are the parties to the test case with the OFT.

However he needed more time to consider some of the terms and conditions used in the past by the Abbey, Lloyds TSB and RBS NatWest.

This week he gave the first two of those banks the rulings they had been seeking; that their former current account conditions did not fall foul of common law.

But he found against the NatWest.

"I still consider the relevant term in the NatWest 2001 conditions to be contractual and to impose a contractual prohibition on the customer," said the judge.

"I therefore remain unpersuaded that the relevant term in the NatWest 2001 conditions is not capable of being penal," he added.

Common law

The significance of the judge's decision is that if a clause in a contract imposes an obligation not to do something - such as not going overdrawn on a current account without permission - then any money charged for breaking that condition must not be more than is actually necessary to compensate the bank.

That is because under common law it is illegal for any penalty charges or fees, imposed by a business, to be excessive.

Campaigners have argued that typically it does not cost a bank more than about 2 to tell someone they have gone overdrawn and to repay their unauthorised borrowing.

In contrast, bank charges have sometimes been more than 30 each time a customer has gone into the red or had a cheque bounced.

"The OFT and RBS group are considering their positions pending finalisation of the order," said an OFT spokeswoman.

This means either side could appeal, which might delay any attempt to start a case in the county courts.

And this week the Financial Services Authority (FSA) gave the banks another six months in which they could park any claims for the return of bank charges.

"The fact that the FSA's waiver, which has just been extended by another six months, is still in place with the exception of financial hardship cases and it could be very difficult for anyone to make a successful claim at this stage," said Chris Warner of Which?

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