Update: consumer

The Supreme Court's judgment on unauthorised overdraft charges has come as a huge shock. After a High Court and a Court of Appeal judgment backing the Office of Fair Trading (OFT), one could be forgiven for anticipating that last week's Supreme Court ruling would favour consumers. Not so.

While the litigation has been extensive, the issue is relatively simple: can charges by banks for unauthorised borrowing be assessed by the OFT as to their fairness under the Unfair Terms in Consumer Contract Regulations 1999 (UTCCRs)? If they can and were found unfair, they would not be binding on any consumer. That could result in the repayment of up to £20bn of charges, the loss of an estimated annual income for all of the banks of £2.6bn and the loss of a significant subsidy of bank account costs.

Regulation 6(2)(b) of the UTCCRs states that such terms can only be challenged on the grounds of unfairness if the assessment does not relate:

'(a) to the definition of the main subject matter of the contract; or

(b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange' (and crucially that safe harbour is only available if the term is 'in plain intelligible language').

Initially, the OFT obtained an order in the High Court in the case of OFT v Abbey National PLC & Ors [2008] EWHC 875 (Comm) that such bank charges could be assessed for fairness by the OFT.

The banks appealed that decision in the Court of Appeal in OFT v Abbey National PLC & Ors [2009] EWCA Civ 116, but two Lord Justices and the Master of the Rolls unanimously rejected the appeal.

On 25 November at 9:45am Lord Phillips announced to massed ranks of TV cameras and journalists that, in OFT v Abbey National PLC & Ors [2009] UKSC 6, five law lords of the Supreme Court had overturned the lower courts' decisions.

They did so more or less unanimously. Whereas the Court of Appeal had held that the relevant charges were ancillary to, not part of, the core bargain, the Supreme Court held that that was not the point at issue. A challenge on the ground of unfairness could apply whether or not the charges were ancillary to the core contract. These charges constituted part of the price or remuneration for the banking services provided and, therefore, in so far as the terms giving rise to the charges were in plain intelligible language, no assessment under the UTCCRs of the fairness of those terms might relate to their adequacy as against the services supplied.

This is a hammer blow to the claims for repayment which more than a million consumers have made. It may not be the end of the story. It may be open to consumers to claim that a particular term justifying a charge was not in plain and intelligible language. Individual consumers could take the matter to the ECJ. The OFT may continue the fight through a Competition Commission enquiry or, as Lord Phillips cautiously suggests, by use of regulation 5 of the UTCCRs (which regards as unfair any term causing 'significant imbalance in the parties' rights'¦ to the detriment of the consumer'). The FSA could regulate such charges through The Financial Services and Markets Act 2000.

The banks, having won the fight but lost further public sympathy, may agree with the OFT on a more transparent system of charges.

The other possibility is that Parliament could amend the current laws to give more protection to consumers. When the UTCCRs were transposed into UK law from a European directive, Parliament actively decided not to enhance them. This was, as Lord Walker notes in the latest judgment, 'in an era of so-called 'light-touch' regulation'. That era seems long past. An easy vote-winner would be to promise future protection from unfair charges.

The break up of the big banks: legal aspect

Whatever the economic, policy or political reasons for the break up of the big banks, it is European competition law which is the real cause. The state aid supporting the banks is the problem. Articles 87 to 89 of the Treaty establishing the European Commission gave it wide-ranging powers to investigate illegal subsidies and to order member states to recover subsidies which distort the market. The various rescue packages have been, so far, justified and cleared on the basis of article 87 as aids to remedy 'serious disturbance' to the UK economy. However, that clearance (and the forbearance of the EC) cannot remain in place forever.

The proposals are interesting: Royal Bank of Scotland will sell its RBS-branded branches in England and Wales to a new company under the old brand name of Williams & Glyn's '“ known to the current generation of law students perhaps only from one of the more interesting cases on the interpretation of the Land Registration Act 1925 (Williams & Glyn's Bank v Boland [1981] AC 487). Lloyds will be divested of its Scottish business under the TSB name, while the third new bank will be the 'good bank' half of Northern Rock.

How much additional competition that will bring is a moot point as those banks will have an existing customer base, and, presumably, limited means to offer attractive deals to new customers. At least they may continue to charge significant amounts for unauthorised overdrafts.

FSA's mortgage market proposals

The FSA announced on 19 October several proposals to enable a reliable mortgage market 'that works better for borrowers'. While on the surface of its more public comments and press releases the FSA highlights the desire to 'keep the mortgage market buoyant' and 'vibrant and sustainable', it is honest in the detail that it intends an 'intrusive and interventionist style' of regulation of lenders.

The proposals are intended to be implemented imminently, with a consultation process ending on 30 January 2010 and the gradual phasing in of changes from April 2010. However, in practice, it is unlikely that many changes will take effect during at least the first half of 2010 (and some not at all).

The headline proposals for the future are:

• imposing affordability tests for all mortgages and making lenders responsible for vetting borrowers' ability to pay;
• banning 'self-cert' mortgages (proof of income will be required);
• banning mortgage products that put borrowers at risk;
• banning arrears charges when a borrower is already repaying and preventing mortgage providers from profiting when people are in arrears;
• requiring all mortgage advisers to be accountable to the FSA; and
• calling for the FSA's scope to be extended to cover buy-to-let and all lending secured on a home.

John Healey, the housing minister, characterised some of the changes as 'new protections, which will mean struggling homeowners get the tolerance and understanding they need from their lender, and that they won't be stung by unfair and excessive charges'. Just how correct is that prediction?

The first material targets are the 'high-risk lenders'. The FSA aims to impose more onerous capital requirements and direct supervision on less cautious lenders, particularly those who seek to lend to borrowers with poor credit histories at a very high loan to value without verifying income levels. The other main aims are: unfair, excessive or exploitive charges; to extend regulation to protect those granting second and subsequent charges and mortgages for buy-to-let purposes (this would require the government to give the FSA that power to regulate those markets); and to improve the behaviour of lenders in respect of arrears and repossession.

One of the more intriguing ideas in the paper is that the assumption that borrowers will always behave rationally should not be a basis for future regulation. Interestingly, the paper uses the word 'mis-buying' more often than it uses the word 'mis-selling'.

John Healey's analysis is overblown. These proposals remain just proposals. Moreover, they are late, coming at a time when the mortgage market has shrunk significantly. They will increase the cost (and restrict the flexibility) of lenders while also closing the door on some self-employed or commission-earning people to obtain credit. For most other consumers, the effect may be that specific charges are lower and more transparent, but the overall charges will have to reflect the additional cost of regulation. At the same time, the evidence required to borrow will multiply and there could be severe restraints on particular products (for example, interest-only and equity release mortgages).

BIS' review on credit card terms

In the government White Paper 'A Better Deal for Consumers' (See Solicitors Journal 153/34 15 September 2009), BIS committed to review the regulations governing consumer credit and store cards.

This consultation announced on 2 November sets out the 'options for change' that cover four specific aspects of the way credit and store cards operate:

• the allocation of payments (to prohibit the practice of using payments to pay off lower interest debts being paid off first);
• minimum payments (which might lead the consumer into thinking that capital is being paid off);
• unsolicited credit limit increases; and
• the unilateral increase of existing rates without proper explanation.

It also identifies scope to improve the simplicity and transparency of credit and store cards and to aid comparison.

The Builders Merchants Federation's improved terms and conditions

The OFT has persuaded the Builders Merchants Federation to make its terms and conditions clearer and fairer for consumers who buy materials for home improvements.

This 500-member federation found its members increasingly dealing with members of the public and approached the OFT for advice on improving its terms and conditions for consumers.

Its members have now agreed to implement revised terms and conditions with a view to complying with the UTCCRs. The improvements to members' contracts include:

• clarification of circumstances under which a written quotation may vary and how the consumer can confirm or cancel the contract in exchange for a full refund;
• improved cancellation rights for consumers without any penalties where there is a significant increase in price;
• clearer language ensuring terms are plain and intelligible; and
• the amendment of terms relating to exclusions of liability.

Draftsmen of terms and conditions forconsumers should follow this example of compliance with UTCCRs. The banks can now proudly say that they have done this all along.