UK: Bank Charges On Unauthorised Overdrafts To Be Subjected To Fairness Test

Last Updated: 7 May 2008
Article by Robert Hickmott, Susan Hankey and Richard Hayllar

In last Thursday's judgment, Mr Justice Andrew Smith held that, although the defendant banks' standard terms relating to charges are largely in "plain intelligible language", they are not immune from assessment as to fairness under Regulation 6(2) of the Unfair Terms in Consumer Contracts Regulations 1999. Although it is anticipated that the banks will appeal this decision, Smith J's ruling allows the Office of Fair Trading to proceed with its investigation into the charges.

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In last Thursday's judgment, Mr Justice Andrew Smith held that, although the defendant banks' standard terms relating to charges are largely in "plain intelligible language", they are not immune from assessment as to fairness under Regulation 6(2) of the Unfair Terms in Consumer Contracts Regulations 1999. Although it is anticipated that the banks will appeal this decision, Smith J's ruling allows the Office of Fair Trading to proceed with its investigation into the charges.

Legal Background

These proceedings, commenced by the OFT in July 2007, relate to charges made by banks to personal customers who have overdrawn on their accounts without prior arrangement.

These charges and the terms in the banks' standard terms and conditions providing for them are currently being challenged on two fronts:

  1. Their fairness is being investigated by the OFT under the 1999 Regulations; and

  2. Their enforceability is being disputed in the County Courts by individual customers seeking to rely on the common law relating to penalties.
    The County Court actions are presently on hold, as the OFT's investigation develops.

1999 Regulations

Regulation 6(2) provides:"In so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate & to the adequacy of the price or remuneration as against the goods and services supplied in exchange".

The banks contended that the terms in question are exempt from assessment under Regulation 6(2), on the following grounds:

(i) such an assessment would relate to the adequacy of the price or remuneration received by the bank, and so is prohibited by Regulation 6(2);

(ii) the terms are "in plain intelligible language"; and

(iii) if the banks are correct on point (i), the terms relating to these charges are entirely exempt from any investigation of fairness.

Do the terms relate to the adequacy of the banks' remuneration?

Most importantly, Smith J held that the terms in question were not exempt from assessment on the basis that they "relate& to the adequacy of the price or remuneration, as against the goods or services supplied in exchange". Accordingly, the OFT was entitled to consider the fairness of the structure of the banks' "free if in credit" pricing regime.

Specifically, he held that Regulation 6(2) prohibits assessment of the fairness of the essence of the bargain between a supplier and a consumer. These charges did not constitute the "price" for the services offered by the bank, and an assessment of these charges did not impinge upon the adequacy of the package of benefits received by the bank in exchange for the package of services it provided; consideration of the fairness of the pricing regime is not the same as an assessment of the overall "adequacy" of the benefits to a bank operating an account.

Were the terms in "plain intelligible language" and did it matter?

Smith J examined the defendant banks' standard terms in detail, before concluding that the terms of HSBC, Lloyds TSB, Nationwide and RBSG are in "plain intelligible language" and those of Abbey, Barclays, Clydesdale and HBOS are in plain intelligible language except in certain specific and relatively minor parts.

The banks had contended that any assessment of fairness ought to be restricted to the parts of the term that are not "plain and intelligible", but as Smith J had found that these terms fell outside the exemption in Regulation 6(2) in any event, this argument did not need to be considered in detail.

What is the nature of the exemption in Regulation 6(2)?

Although this issue was also academic in light of the decision on point (i), Smith J confirmed that if the exemption in Regulation 6(2) did apply, it precluded an assessment of the adequacy of the price, rather than (as the banks had argued) any assessment of the fairness of the term at all. This would mean that the real value of the service being provided could be taken into account when assessing fairness, but the "price" itself could not be examined.

Common Law

Smith J accepted the banks' submission that none of the terms considered could be deemed unenforceable on the grounds that they are penal. The Judge found that none of the charges represented a sum payable as compensation for a breach of a contractual commitment by the customer, so that the charges could not be characterised as a penalty.

However, this victory for the banks was also somewhat academic in light of the Judge's decision that the OFT's investigation could proceed, and the Judge encouraged the OFT to think carefully before appealing that decision.


In his judgment, Smith J emphasised that his ruling did not necessarily mean that the terms imposed by the Banks were unfair under Regulation 5(1), nor did he rule that they are not binding on consumers under Regulation 8(1). These were not issues for him to consider at this stage.

The parties now have to decide whether or not to appeal any of the points that Smith J did decide on, and will present any applications at the Case Management Conference scheduled for 22 May 2008, at which a timetable for the next steps will also be drawn up.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 02/05/2008.

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