The overdraft fee verdict… (yes the £0.01 overdraft)

A twenty-eight month debate that left even the most astute consumer a little confused finally came to a close at the end of last year. With banks charging as much as £39 for any unplanned overdraft, there has been much public debate as to the legality of something seemingly so unjust.

The case was sparked initially by the request of a law student from Plymouth. He argued that under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR), all penalty charges had to reflect the cost of administering them and thus if they are higher then the costs are illegal. The small claims court rewarded the student with a mammoth £5000 despite the claim being for £840. Furious, the banks then sought a declaration that their charges for exceeding overdraft limits were not penalty clauses. More than likely they were in a very real anticipation of barrage of similar claims coming from across the country.

The OFT investigated charges where bank customers requested or instructed a bank to make a payment beyond their overdraft and argued that the breach of contract was not going into the overdraft but rather the customer instructing the bank to go into the overdraft. They argued that using a card without funds was a breach and therefore the charge was not penal. If that sounds like a confusing conclusion, lets take a look at the series of decisions the courts made…

Now in the High Court, Justice Smith granted declarations for the banks. The ruling applied to “unpaid item charges, paid item charges, overdraft excess charges, and guaranteed paid item charges”. So the banks managed to successfully establish that the contractual terms were not penal because the charge was not consequent on any breach of contract by the customer.

The banks then argued that s6(2) of the UTCCR was inapplicable to the charges in question because they charged a remuneration for services provided by the bank and the particular terms are not severable from the contract as a whole. This was completely rejected by the High Court so customers were able to continue claims against their banks and even make new ones.

Naturally the banks appealed.

Sir Anthony Clarke, Waller LJ and Lloyd LJ held in the Court of Appeal that the OFT had the jurisdiction to assess the fairness of the clauses.

This set in motion the final decision to be made in the Supreme Court. Permission to appeal was granted on 31 March 2009 and judgment was handed down by the Supreme Court at 9.45 am on Wednesday 25th November 2009…

The Law Lords found unanimously in favour of the banks, stating that the charges were a core term of the contracts for bank accounts, relating to the banks’ remuneration.

But lets be clear, the Supreme Court was not saying that it was within their power to determine whether the charging system of UK banks is fair. Rather the limited scope of the case meant that the matter for the court was whether (as a matter of law) the fairness of bank charges levied on personal current account customers in respect of unauthorised overdrafts can be challenged by the OFT as excessive in relation to the services supplied to the customers.

Lib Dem leader Nick Clegg has stood firm declaring that no matter what the legal position is an unintentional withdrawal of a penny should not result in a £25 fine but acknowledges that the only way to prevent it is through a change in the law. Considering that the actual cost of processing overdraft fees is as little as £2.50, it would be nice to see banks volunteer a fairer system, perhaps one based on proportionality??

I sincerely hope that there has been a degree of demystifying here and that you are clear on the legal position: stop claiming back overdraft fees! Keep an eye on your finances down to the penny and well done to those who got in before the case shut down!