OFT Test Case: Q & A's 30 May 2008

Questions and answers for OFT personal current account work

Updated 30 May 2008

Overview

1. What work is the OFT doing relating to personal current accounts?

Timeline

The test case process

2. Where does the test case process fit in?

3. What was the April judgment about and what happens next? 4. When will there be a decision on fairness?

5. Does reference to 'approaching the banks' mean that the OFT may simply do a deal with the banks behind closed doors?

6. Will the test case have any implications for other financial contracts such as for credit cards and business bank accounts?

7. How does the test case affect consumers in Northern Ireland and Scotland?

8. Which banks are taking part in the test case process?

9. Will the OFT be publishing all the court documents on its website?

Outcomes

10. I don't incur charges, what is OFT doing to protect consumers like me?

OFT, Financial Services Authority and Financial Ombudsman Service

11. What are the roles of the OFT, Financial Services Authority and Financial Ombudsman in all of this?

Consumer Complaints

12. What happens to those wanting to reclaim, or in the process of reclaiming charges?

13. Why can the banks continue to levy charges?

Overview

1. What work is the OFT doing relating to personal current accounts?

There is widespread concern about whether personal current accounts provide value for the UK consumer, and in particular whether unarranged overdraft and returned item charges ('UOD charges') are fair. The best way to get a good outcome for consumers is to make sure that consumers understand what they are paying and if necessary, can move to banks that offer better value for money.

Market study

To achieve this outcome we launched a personal current account market study in April 2007 to consider the wider questions about competition and value for money in the provision of personal current accounts, such as: • transparency of costs to consumers, and • ease of switching.

We will be publishing the study in a few weeks time having taken account of the implications of the test case preliminary issues judgment (see Q2 below).

A consultation document on remedies will be published at the same time and will outline the measures we are proposing, in particular whether they are likely to bring about improvements, and if so, at what cost. In accordance with Cabinet Office guidelines, we will allow 3 months for the consultation and will publish final recommendations towards the end of the year or in early 2009.

UTCCRs investigation To directly address concerns about UOD charges, we also launched an investigation, under the Unfair Terms in Consumer Contracts Regulations 1999 ('UTCCRs'), into the fairness of standard terms in personal current account contracts that provide for the charges ('UOD terms').

This investigation is considering (amongst other things) the level of UOD charges and how they are applied.

The final decision on whether any term is unfair is a matter for the courts. A test case process is happening, alongside the investigation. More information about this below.

Timeline

7 September 06 Initial review into unarranged overdraft charges

26 April 07 Launched market study and UTCCRs investigation

26 July 07 Commenced test case proceedings

17 January 08 First High Court hearing on preliminary issues

24 April 08 Judgment delivered on preliminary issues

22-23 May 08 Case Management Conference

7-9 July 08 Further High Court hearing on preliminary issues

The test case process

2. Where does the test case process fit in?

In July 2007, the OFT entered into a written litigation agreement with seven banks, one building society (‘the test case banks’)1 and the Financial Services Authority ('FSA') with a view to bringing an early test case process, to run alongside our overall investigation. The aim of the test case process is to ensure that the complex legal issues are resolved in an orderly, efficient and speedy manner. By bringing this action on behalf of consumers we are seeking to gain the legal clarity necessary to achieve the fair and consistent handling of consumer complaints.

3. What was the April judgment about and what happens next?

Basically, the test case process is happening in two stages

At this first stage, the court has been asked to rule on certain legal points of principle in dispute between the OFT and the test case banks, the key aspect of which was whether the fairness of the UOD terms can be assessed by the OFT under the UTCCRs.

In April, Justice Andrew Smith ruled that the UOD terms (those which are currently found in the test case banks' personal current account contracts): • can be assessed for fairness under the UTCCRs3. • are largely in plain intelligible language4; and • are not penalties at common law.

The court was not asked to consider at this stage the question of whether or not the UOD terms are actually unfair. We are considering this through our overall investigation and, if necessary, it will be dealt with at stage 2 of the test case process.

At a case management conference in May, the judge gave the test case banks permission to appeal his finding that the UOD terms can be assessed for fairness under the UTCCRs. We are working with the court and the test case banks to ensure that the appeal process happens as quickly as possible. Because the April ruling was limited to current UOD terms, there will be a further hearing on 7 - 9 July to determine whether the UOD terms in the test case banks’ basic account and historic personal current account contracts (and certain other non-mainstream current accounts) can also be assessed for fairness under the UTCCRs and whether they are capable of being penalties at common law.

4. When will there be a decision on fairness?

Depending on the outcome of our overall investigation, the second stage of the test case process will deal with whether the UOD terms are actually unfair. We are continuing with our investigation and aim to be in a position during July to begin approaching the banks with our initial views on the question of fairness.

5. Does reference to 'approaching the banks' mean that the OFT maysimply do a deal with the banks behind closed doors?

No. We want to see fair treatment of consumers and are determined to achieve successful resolution for the benefit of consumers. Our position is simply that, if we can resolve any concerns we have about the UOD charges, (for example, if the banks provided satisfactory undertakings to the OFT) without the need for further, lengthy, court action, then this would be in the best interest of consumers. This is no different to the approach we would take in any UTCCRs or Enterprise Act 2002 case because the OFT is usually required to seek voluntarily resolution before starting enforcement proceedings.

6. Will the test case have any implications for other financial contracts such as for credit cards and business bank accounts ?

The OFT's primary concern is whether the terms in banks' personal current account contracts providing for unarranged overdraft charges comply with the UTCCRs; the judgment is an important milestone in the process of establishing that, and any legal precedent that arises from this. The extent to which the judgment provides legal precedent for cases on other matters is something for consideration in relation to the particular circumstances of those cases.

7. How does the test case affect consumers in Northern Ireland and Scotland?

The UTCCRs apply across the UK and the outcome of the test case will be relevant for consumers right across the UK.

8. Which banks are taking part in the test case process?

The following are parties who agreed with the OFT to take part in the test case: • Abbey National plc • Barclays Bank plc • Clydesdale Bank plc • HBOS plc • HSBC Bank plc • Lloyds TSB Bank plc • Nationwide Building Society • The Royal Bank of Scotland Group plc.

This selection of banks covers the bulk of the personal current account market (estimated to be over 90 per cent) and their terms and conditions are representative of contracts used currently in the retail banking market.

9. Will the OFT be publishing all the court documents on its website?

Wherever we can, we will seek to publish the court documents.

Accordingly, we have published our Particulars of Claim (and schedules A and B), the banks' defenses and our reply on the website. Broadly speaking, the Civil Procedure Rules ('CPRs') say that some documents - like particulars of claims - should be freely available publicly. They would usually be freely available from the court, but we will seek to make them available on our website. The CPRs also say that the availability of other documents - such as the witness evidence and the skeleton arguments - is more restricted, and they are only available on specific application to the court.

To obtain a quote for copies of transcripts of court hearings, please contact the Case Management Department at Merrill Legal Solutions on (020) 7421 4010.

Copies of the Judgment and other test case documents can be found here: [1]

Outcomes

10. I don't incur charges, what is OFT doing to protect consumers likeme?

The purpose of our investigation is to consider whether the UOD terms are compliant with the UTCCRs, designed to protect consumers against unfair standard terms in contracts they make with businesses. To reach a view on this we are looking at things like how much banks charge, and how they charge. However we are not saying that banks can't charge people who mismanage their account at all.

The initial scoping work we did highlighted that the question of whether the UOD terms are unfair needs to be considered in the context of the market, and consumers, as a whole. We therefore launched a personal current accounts market study at the same time as the UTCCRs investigation to focus on price transparency, ease of switching, fairness of the pricing structure across the full range of services offered by banks, and the potential consequences of any enforcement action in relation to the UOD charges for all consumers. It will include data from an extensive survey of consumers in all financial situations, and an analysis of how much it costs them to run their account, based on data provided to the OFT by the banks.

We will be reporting on our findings in a few weeks time having taken account of the implications of the test case judgment.

What we want to achieve, is a situation where bank customers are armed with the knowledge and skills to make rational and informed decisions about their banking, and where they feel able to vote with their feet and switch banks if necessary, to get the best deal.

OFT, Financial Services Authority and Financial Ombudsman Service

11. What are the roles of the OFT, Financial Services Authority andFinancial Ombudsman Service in all of this?

The OFT's role is to make markets work well for consumers. Its responsibilities include enforcement of the UTCCRs, where appropriate. The OFT does not have the power to intervene in individual disputes between consumers and businesses, rather, it is the OFT's duty to consider any complaint that a consumer contract term is unfair and, if appropriate, apply for an injunction from the court to prevent the continued use of a term, or similar term.

The Financial Services Authority (FSA) regulates the financial services industry and in particular deals with how banks handle complaints. Like the OFT, it does not handle individual complaints but it does have an interest in ensuring that complaints about past actions are satisfactorily dealt with. The FSA is a Qualifying Body under the UTCCRs, meaning it too has the power to enforce them, where appropriate.

The Financial Ombudsman Service (FOS) has responsibility for dealing with individual complaints by customers.

While all three organisations hold different roles, we have been working together to ensure that this process is well coordinated.

Consumer complaints

12. What happens to those wanting to reclaim, or in the process ofreclaiming charges?

If consumers believe they have been wrongly or unfairly charged by their bank, they should raise the issue with their bank in the first instance.

The normal complaint channels have been affected by the test case process as follows: • To facilitate the test case, in July 2007, the FSA granted a number of banks a waiver6. This means that banks (and building societies) that were granted the waiver do not have to deal with complaints about UOD charges whilst the waiver is in force. The waiver does not interfere with the banks' obligations under the Banking Code, which sets out how businesses should deal with cases of financial difficulty. The FSA will continue to assess whether the waiver remains necessary and appropriate in light of the prevailing circumstances. For further information, please see the FSA website:[ www.moneymadeclear.fsa.gov.uk/.] • For the time being, the FOS has decided not to progress complaints or deal with new ones, other than in hardship cases. • The courts may also 'stay' (put on hold) claims made to them. Whether and when those stays are lifted is for the courts to decide.

The waiver can be found at: [2]

13. Why can the banks continue to levy charges?

As we have not yet concluded our investigation, it would not be appropriate for us to ask banks to make changes to their charging structure at the present time.