Page last updated at 15:35 GMT, Wednesday, 24 June 2009 16:35 UK

Banks 'face deluge of litigation'

Lord Phillips
The Law Lords are led by Lord Phillips, the senior Lord of Appeal

Banks face an "appalling prospect" if the Office of Trading is allowed to rule that overdraft charges are unfair, the House of Lords has been told.

The banks would receive a deluge of litigation if the decision was made against them, the court has heard.

Five Law Lords are hearing an appeal by seven banks and one building society against judgements by two lower courts.

The lenders are challenging the right of the Office of Fair Trading to decide if overdraft charges are fair or not.


Jonathan Sumption QC, for the banks, said if the previous ruling in favour of the OFT was upheld, the banks would face a deluge of litigation with claims going back many years.

Nearly a million people have claimed for the return of their unauthorised overdraft charges but their cases are on hold
If the banks win this week's appeal, these people are unlikely to get any money back
If the banks lose, then the legal arguments should move on to a key stage - a case to determine whether these charges were fair or not
Only then will people have a clearer picture as to whether billions of pounds will be handed back to customers

"That prospect is appalling," he said.

He said if the courts upheld the right of the OFT to scrutinise bank charges, then the charges might be deemed unenforceable for a time period dating all the way back to the 1990s.

That was because European Union regulations on unfair terms in consumer contracts had been introduced into UK law during that decade.

Alternatively, Mr Sumption argued, all personal current account contracts might become unenforceable in total.

At the core of the arguments is whether bank charges are exempt from the Unfair Terms in Consumer Contract Regulations (UTCCR) and whether the OFT can scrutinise or regulate the charges.

Mr Sumption argued that the price being paid by bank customers for the use of their overdrawn accounts was not something that fell under the above regulations.

"Does our case allow extortionate prices? Yes," he said.

"The remedy for extortionate prices lies in the domain of competition regulations, not in the domain of contract regulations."

'Consumer categories'

Mr Geoffrey Vos QC, for the Nationwide Building Society, supported the arguments of the banks.

In particular, he said, the Court of Appeal had been wrong in law to analyse the impact of overdraft charges from the point of view of consumers who stayed in the black.

A bank statement with overdraft charges
The banks have been outlining their case

He pointed out that of 54 million current account holders, 12.6 million paid overdraft fees in any one year.

That meant there were at least two categories of consumer - those who paid and those who did not pay overdraft fees.

"The typical consumer is one who pays, intends to pay, or expects to pay debit charges," said Mr Vos.

"The charges are clearly recognisable as the price for this service for the debit customers."

So, Mr Vos argued, the bank charges were necessarily exempt from the Unfair Terms in Consumer Contract Regulations (UTCCR) and the OFT could not scrutinise or regulate them.

'Consumer protection'

Mr Jonathan Crow QC, representing the OFT, spent the afternoon rejecting some of the assertions of Mr Sumption and outlining the case for the OFT.

The OFT investigation will proceed irrespective of the outcome of this appeal because the relevant overdraft terms are still assessable to fairness
Jonathan Crow QC

He denied that the OFT was trying to conduct price control and said it was interested in consumer protection, which was the other side of the coin from the operation of competitive markets.

"We are looking at market failure because the consumers are not thinking about banking charges and banks can raise their charges without losing customers," he said.

He said there was no justification for the banks' suggestion that the OFT should use competition law rather than consumer contract regulations if it was worried about overdraft charges.

He pointed out that going to the Competition Commission was not a route available to ordinary consumer.

However, the consumer contract regulations did give consumers rights they could pursue in national courts.

Investigation goes on

Mr Crow went on to justify the OFT's intended use of the consumer contract regulations to scrutinise the fairness of bank overdraft charges.

"Price terms have not been given some kind of ring-fenced status," he said.

"Price clauses have not been carved out from the application of the regulations."

He went on to assert that overdraft terms could still be assessed for their fairness for reasons other than price, for instance if customers were taken by surprise.

He told the Law Lords that the OFT's current investigation into overdraft charges would continue even if it lost the current appeal.

"The OFT investigation will proceed irrespective of the outcome of this appeal because the relevant overdraft terms are still assessable to fairness," he said.

Mr Crow denied that a victory for the OFT in this appeal would lead to a disastrous upheaval for the UK's banking system.

He said the OFT was looking not only at the size of overdraft charges but how they were applied and how they affected customers. The OFT might, for instance, seek variation of bank interest rates associated with overdrafts.

The hearing is expected to end on Thursday.

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