Watching the watchdog

It has been a busy time at Fleetbank House, the headquarters of the Office of Fair Trading (OFT) in recent months. Initial success in the outcome of the much anticipated bank charges test case, dawn raids at offices of Barclays and Royal Bank of Scotland (RBS), and a £100,000 apology to supermarket chain Morrisons in part explain the high level of media and judicial commentary on the consumer watchdog.

The facts which gave rise to the case brought by the OFT against Britain's biggest banks (Office of Fair Trading v Abbey National Plc [2008] EWHC 875 (Comm)) go back to 2005 when a number of banks increased their charges for unauthorised overdraft.

Some of the charges soared 50 per cent from £25 to £38. The controversy surrounding the estimated £3.5bn income from default charges every year reached fever pitch in the popular media, and the Money Mail's James Coney's November 2006 crusade on bank charges was named Consumer Campaign of the Year in the Bradford & Bingley Personal Finance Awards.

Between the summers of 2006 and 2007, banks began returning money to customers, with some successfully claiming back thousands in fees. A number of banks settled claims immediately, while others tried to stem the flow by defending their position in court. By July 2007, thousands of bank customers had claimed back an estimated £800m from banks, some of them supported in their efforts by the emergence of a number of opportunistic companies offering to recover charges on a 'no-win no-fee' basis.

OFT investigation

The OFT investigation into unarranged overdraft fees was started in April 2007. The banks took the position that the charges were excluded from consideration of fairness under the Unfair Terms in Consumer Contracts Regulations 1999. The OFT thought otherwise and it was agreed that litigation was required to resolve the matter. On

27 July 2007 the OFT issued proceedings against seven banks: Abbey National Plc, Barclays Bank Plc, Clydesdale Bank Plc, HBOS Plc, HSBC Bank Plc, Lloyds TSB Bank Plc, Royal Bank of Scotland Group Plc and the Nationwide Building Society. At around the same time, the Financial Services Authority granted the banks involved in the case a temporary dispensation, allowing them to put all claims from customers on hold until the test case is concluded.

A number of banks have already issued warnings that a favourable decision for the OFT is likely to herald the end of free banking in the UK.

The legal issues at the crux of the litigation are reasonably straight forward. A personal account holder at a bank may have a number of facilities associated with their accounts, such as the ability to process direct debit transactions and an overdraft. Banks had typically been charging fees of around £30 for authorising a transaction which puts a customer over their authorised or pre-agreed overdraft limit.

The banks' position is that exceeding the agreed overdraft limit constitutes breach of contract on the part of the customer, entitling the bank to be reimbursed with a 'reasonable sum' to cover the costs it has incurred as a result of the breach, or otherwise the value of the injury represented in cash terms '“ liquidated damages. Where the amount demanded by the injured party exceeds the actual losses flowing from the breach, the party in breach will argue that they have no obligation to pay the excess. A contractual provision which could allow the enforcing party to recover more than their actual losses may be unenforceable at law. Any clause which will in effect unjustly enrich the wronged party will also be considered unlawful at common law.

In the High Court Sir Justice Andrew Smith court heard a considerable rap sheet levelled at the defendant banks. Brian Doctor QC of Fountain Court Chambers submitted arguments for the OFT that the charges were 'highly unusual, both in their contractual form and the way they operate'. He described some of the overdraft charges as excessive and said that they constituted penalties; that terms and conditions supplied by the banks were not written in 'plain intelligible language'; that the banks 'speak a strange language' and that overdraft facilities are not a chargeable service.

Not considered as penalty charges

The High Court found in favour of the OFT in its argument that if a bank refuses to pay out on a cheque then it cannot say that any service has been provided. However, if banks do pay out on a cheque it found that that should be regarded as a service being provided. The court also thought that charges for unauthorised overdrafts should not be considered as penalty charges per se. The first instance decision has left the gate open for the OFT to pursue a ruling that the default charges are subject to the unfairness tests to which other consumer contracts are commonly subject.

The respondent banks have appealed this decision on two grounds: the jurisdiction of the OFT under consumer contract legislation to pursue the case, and the fairness of the charges themselves.

The banks' appeal is likely to be heard this autumn and if it fails, then there could be an end in sight. However, should either party take the matter to the House of Lords, the question about the OFT's jurisdiction is unlikely to be settled this year. Banks and customers alike are looking at stayed claims and an uncomfortable hiatus before they can either confidently reclaim their charges or relinquish them for good.

However, it appears that one of the banks is not prepared to wait for a final decision. In a widely criticised move, Barclays has announced it will reduce its unauthorised overdraft charges from £35 to £22 and bring in a 'personal reserve' buffer of £250 on average above customers' agreed overdraft limits. Barclays say that the personal reserve aims to reduce charges to customers being incurred by going overdrawn without permission. Customers will be charged £22 to go into the personal reserve and, once there, can make as many transactions as required over a five-day period. If you exceed the reserve limit, payments will be refused at a cost of £8 per transaction. Customers have to sign up to the reserve before they can use it.

Campaigners against unfair overdraft charges believe the bank is trying to pre-empt an unfavourable ruling in the High Court. The Consumer Action Group has announced plans to complain about the bank's actions to the Financial Services Authority. The FSA might well prefer to reserve judgment until the litigation is played out. Until then, the banks, their customers and the regulatory bodies will remain in limbo.

The people's champion?

While the OFT might be considered something of a 'people's champion' in some quarters for its role in the bank charges litigation, its spell of fairly aggressive activity in other areas, such as dairy price fixing and construction, has garnered criticism from the judiciary and leading business figures that the watchdog is pursuing a self-serving and populist agenda.

The Enterprise Act 2002 represented a landmark in the evolution of the OFT, providing it with an armoury of new weapons. Under the Act, the OFT was empowered, inter alia, to fine 'cartels' up to10 per cent of their worldwide turnover, while individuals found to be involved in cartels could now be fined and imprisoned for up to five years. Furthermore, if a business breaches consumer protection law covered by Part 8 of the Enterprise Act, the OFT or an enforcement partner was now able to pursue several courses of action '“ including accepting undertakings, Enforcement Orders, and actions for contempt of court.

Since the appointment of former chairman of the Irish Competition Authority John Fingleton as chief executive in October 2005, the OFT has been criticised by some for shifting its focus from scrutinising small and medium-sized businesses to targeting alleged malpractice at some of Britain's biggest companies. In 2007, fines imposed by the OFT increased a staggering 76-fold to £237m. That compares to four fines handed out in 2006 worth a total of £3.1m and two fines totalling £697,000 in 2005.

In the course of its investigation into the price fixing of milk involving the UK's largest supermarkets, the OFT issued a press release in September 2007, incorrectly stating that Morrisons was the subject of a provisional finding of infringement in relation to the supply of butter and cheese in 2002 and 2003.

It also said that the supermarket had previously been warned by the OFT against anticompetitive behaviour, which was not in fact the case.

In granting the supermarket giant the right to judicial review of the OFT's findings, Mr Justice Davis stated: 'The original press release seems to me to illustrate the dangers of bodies such as the Office of Fair Trading engaging in public relations exercises designed or calculated to attract potentially sensationalist publicity via the media.'

Fingleton's tenure to date has been partly characterised by a crusade against large supermarket chains, apparently on the basis that competition ultimately rewards the consumer. However, on 23 April 2008, the OFT issued an apology to Morrisons and paid £100,000 for wrongly suggesting that it was guilty of price fixing.

Undaunted, the OFT has nonetheless remained active. On 3 June 2008, it raided Barclays and RBS as it launched an investigation in to the price-fixing of loans to professional services companies, including law firms.

On 11 June 2008, three former executives were imprisoned for their part in a worldwide cartel to fix the price of marine hoses, the first to feel the full force of the criminal liability that now attaches to anti-competitive behaviour. The trial judge indicated that prison sentences might be increased for cartels found to have been operating after the implementation in the UK of the criminal law provisions of the Enterprise Act 2002, in June 2003. These judicial comments, as well as the OFT's recent offer of a £100,000 reward for information leading to the identification of cartels serve to further highlight the growing power of '“ and clear statement of intent '“ from the watchdog.

It is tempting to speculate which industry will come under scrutiny next. Airlines, supermarkets, banks, the glossy magazine industry '“ they have all experienced the full force of the OFT's newly acquired powers. As the credit crunch tightens its grip, the property industry looks like an increasingly feasible target. A compulsory scheme requiring all residential estate agents to join and participate in a redress procedure is already on the cards for October 2008.

The OFT will no doubt enjoy popular success if the Court of Appeal finds in its favour. But whatever the outcome '“ or fall-out '“ from the bank charges litigation, the OFT has secured a formidable presence in the UK business sphere, which is surely set to intensify with Fingleton at the helm.