Quick guides
When are bank charges unfair?
Many businesses have sprung up recently to offer UK customers a service to reclaim bank charges on the basis that they were levied unlawfully because they were set at an excessive level.
Reckon does not offer such a claim management service. Our expertise is in the economic analysis of questions such as whether the charges are excessive, not in the management of claims or negotiations.
We can advise those making or defending claims on economic issues. See our services on issues related to excessive charges.
This quick guide summarises the basis on which bank charges might be reclaimed and provides some links to relevant information and decisions.
What is an unfair charge?
The Unfair Terms in Consumer Contracts Regulations 1999 control the ability of service providers to levy charges for breach of contract.
These regulations implement a European directive. They only apply to contracts with consumers (as opposed to business customers) which are entered on standard terms (as opposed to negotiated terms).
English law recognises the non-enforceability of penal charges for breach of contract independently of the regulations. These common-law rules can potentially apply to any type of contract or customer, although the balance of power between the parties will be a factor in the court's decision.
The test under the common law on penalties and under the Unfair Terms in Consumer Contracts Regulations 1999 are similar: a charge is unfair and unenforceable if it does not represent a reasonable prior estimate of the costs that the breach causes the service provider to incur.
The policy underpinning these laws is that a financial clause whose object is to coerce a party to the contract into compliance with contractual terms (and closing down the option normally available to a party to a contract of breaching the contract and compensating the other side for its loss) will not be enforced by the courts. This is especially so when the penalty clause has been imposed by the powerful party in a relationship characterised by an asymmetry of bargaining power — such as the case of an individual consumer trading on standardised terms with a large bank.
Will the banks repay allegedly unfair charges?
Only the courts can declare individual charges to be unlawful and order their refund (but see "What does the OFT do?" below).
It has been widely reported that banks almost always prefer to settle cases out of court than to defend the reasonableness of their charges in court.
But this is not a universal rule: in May 2007 Lloyds TSB successfully defended a claim by a Mr Berwick that overdraft charges were unfair. The bank convinced the judge that the charges (even returned item fees) had been levied in the normal course of business rather than for breach of contract. Neither the Unfair Terms in Consumer Contracts Regulations 1999 nor the common law regulate the overdraft interest rate or overdraft fees levied by banks.
The same logic would prevent recovery of, say, cash withdrawal fees or account management charges, provided that they were not payable in connection with a breach of contract by the customer.
What does the OFT do?
In relation to the Unfair Terms in Consumer Contracts Regulations 1999, the Office of Fair Trading (OFT) has powers to order companies to change their standard terms when it considers existing terms to be in breach.
The OFT has no power to order repayment of any charges or to help individual consumers. All claims must be made to the bank, or failing that to a court. The court will reach its own view about whether a term is fair or not, based on the evidence and arguments provided by the parties, and is not bound to agree with any view expressed by the OFT.
The OFT has conducted a study into credit card default charges, which concluded with a 2006 policy statement that OFT will only suspect default charges to be excessive if they are above £12. This figure comes from an average cost calculation and the OFT has said that it is open to arguments that card products structured to give lower default rates may justify a higher charge per default event to cover the total costs of handling defaults.
After spending some time investigating the fairness of bank charges, the OFT started a wide-ranging inquiry into personal bank accounts in April 2007.
In parallel to this market study, the OFT announced in July 2007 that it had agreed with a number of banks to bring a case to the High Court seeking a declaration on the applicability of the bank's successful defence in the Berwick case to a (as yet undisclosed) “representative selection” of “charges to be imposed upon customers who seek to make payments for which they do not have available funds”.
It remains to be seen whether this general market study or a court case (which appears likely to be conducted without reference to factual evidence about any actual bank charges, if the court permits such an approach) will help resolve the disputes.
A possible outcome of the OFT's market study would be a two-year investigation by another regulatory body, the Competition Commission. Such an investigation was undertaken on Northern Ireland personal banking in 2005-2007, resulting in a long report ordering banks to provide more information to consumers and to facilitate switching.
About this page
The information on this page has been compiled by Reckon staff on the basis of published sources. We researched this information out of curiosity and to develop our business.
This page is for general information only. There may be errors or omissions in the information that was obtained, and the situation may have changed since the information was collected. It is not a substitute for professional or legal advice tailored to your circumstances.
Reckon LLP is an economics consultancy with expertise in data analysis, economic regulation and competition law. Contact us if you require specific information or advice on economic aspects of unfair charge complaints. We are not authorised to provide financial advice or to conduct litigation.
This page was last reviewed in June 2007 by Franck Latrémolière.