Bank Action Group
Encyclopedia
The UK
default charges controversy is an on-going issue in consumer law, relating to the level of fees charged by bank
s and credit card
companies for late or dishonoured payments, exceeding credit limits, etc.
transactions, standing orders for regular fixed payments, and an overdraft
. Banks may typically charge customers a fee of around £30 (individual banks vary) for authorising a transaction which puts a customer over their authorised overdraft limit, or for refusing payment when there are insufficient funds held in the account to meet it. Similarly, credit card issuers typically (until June 2006) charged customers a fee of around £25 for payment that is late, insufficient, or not made, and the same for exceeding their authorised credit limit. It is estimated that in the financial year 2003-2004, UK banks as a whole benefitted from an estimated £
3 billion as a result of default charges alone.
When a customer exceeds his or her overdraft limit, this constitutes a breach of contract
, as the customer has agreed not to borrow more than agreed. When this happens, the injured party (in this case the bank) is entitled 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 expressed in cash terms (liquidated damages
). The value does not have to reflect the actual amount of the losses, only that it is a reasonable estimate of such. If the amount demanded by the injured party is excessive, they are unjustly enriched
, and the breaching party has no obligation to pay the excess.
Any clause in a contract
which makes a provision by which unjust enrichment may occur may be unenforceable at law - that is to say that if the amount is excessive, the injured party will be unable to enforce the charge in court. Any clause which explicitly provides for unjust enrichment is considered unlawful at common law
.
investigated the charges being imposed on customers of credit card
companies. In its report, the OFT said that many of their default charges were unlawful, as they constituted unjust enrichment. It stated that it would act upon receiving notice of any charge over £12 as a penalty, and therefore unlawful http://www.oft.gov.uk/News/Press+releases/2006/68-06.htm. However, the report also specifically stated that the OFT did not necessarily consider £12 a fair charge, and that this would be up to a court to determine. It suggested that the £12 "cap" was intended as an initial step towards fair practice and compliance with the law. Whether or not an individual charge constituted a penalty fee would be based on the established legal precedent that the only cost recoverable would be actual costs incurred.
The credit card companies have so far failed to produce evidence of their actual costs to the OFT, instead insisting that their charges are in line with policy and information provided to customers. A report in produced in October 2006 by the Competition Commission
on banking in Northern Ireland stated that "[c]harges are a significant source of revenue for the banks on [personal cheque accounts] . [Bank name omitted] said that increased unauthorized overdraft fees were part of the strategic imperative to turn the PCA into a profitable business over time."
Many customers have acted upon the ruling of the OFT, in particular as the report explicitly states that while the investigation was into default charges levied towards credit card customers, there is no reason why the same principle should not extend to personal banking. Some have successfully demanded the return of penalty charges for returned cheques, direct debits and unauthorised overdraft charges. Campaigners argue that the current regime of fees is well beyond the cost of sending a computerised letter if indeed any correspondence is sent at all. Frequently the charges are applied without any notification to the account holder other than when it appears as a transaction in their bank statement.
. In England and Wales, customers can claim back money that has been taken from their accounts up to 6 years ago, in line with the Limitation Act
. Theoretically, a claimant may be able to claim back charges incurred longer than 6 years ago if he can demonstrate he was unaware that the company was acting unlawfully, though this has yet to be tested in a court. In Scotland, the limit is up to 5 years.
So far, no bank or credit card company has ever turned up to defend itself in court at an actual trial
, save one occasion by NatWest, preferring to settle out of court, often days before the case is about to be heard.
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
default charges controversy is an on-going issue in consumer law, relating to the level of fees charged by bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s and credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
companies for late or dishonoured payments, exceeding credit limits, etc.
Legal background
A personal account holder at a bank may have a number of facilities associated with their accounts, such as the ability to process direct debitDirect debit
A direct debit or direct withdrawal is an instruction that a bank account holder gives to his or her bank to collect an amount directly from another account. It is similar to a direct deposit but initiated by the beneficiary...
transactions, standing orders for regular fixed payments, and an overdraft
Overdraft
An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft...
. Banks may typically charge customers a fee of around £30 (individual banks vary) for authorising a transaction which puts a customer over their authorised overdraft limit, or for refusing payment when there are insufficient funds held in the account to meet it. Similarly, credit card issuers typically (until June 2006) charged customers a fee of around £25 for payment that is late, insufficient, or not made, and the same for exceeding their authorised credit limit. It is estimated that in the financial year 2003-2004, UK banks as a whole benefitted from an estimated £
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
3 billion as a result of default charges alone.
When a customer exceeds his or her overdraft limit, this constitutes a breach of contract
Breach of contract
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....
, as the customer has agreed not to borrow more than agreed. When this happens, the injured party (in this case the bank) is entitled 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 expressed in cash terms (liquidated damages
Liquidated damages
Liquidated damages are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach ....
). The value does not have to reflect the actual amount of the losses, only that it is a reasonable estimate of such. If the amount demanded by the injured party is excessive, they are unjustly enriched
Unjust enrichment
Unjust enrichment is a legal term denoting a particular type of causative event in which one party is unjustly enriched at the expense of another, and an obligation to make restitution arises, regardless of liability for wrongdoing.Definition:...
, and the breaching party has no obligation to pay the excess.
Any clause in a contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
which makes a provision by which unjust enrichment may occur may be unenforceable at law - that is to say that if the amount is excessive, the injured party will be unable to enforce the charge in court. Any clause which explicitly provides for unjust enrichment is considered unlawful at common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
.
Precedent case law
- Wilson v Love [1896] 1 QB 626 — A tenant farmerTenant farmerA tenant farmer is one who resides on and farms land owned by a landlord. Tenant farming is an agricultural production system in which landowners contribute their land and often a measure of operating capital and management; while tenant farmers contribute their labor along with at times varying...
agreed to pay an additional rent of £3 per ton by way of penalty for every ton of hayHayHay is grass, legumes or other herbaceous plants that have been cut, dried, and stored for use as animal fodder, particularly for grazing livestock such as cattle, horses, goats, and sheep. Hay is also fed to pets such as rabbits and guinea pigs...
or strawStrawStraw is an agricultural by-product, the dry stalks of cereal plants, after the grain and chaff have been removed. Straw makes up about half of the yield of cereal crops such as barley, oats, rice, rye and wheat. It has many uses, including fuel, livestock bedding and fodder, thatching and...
that he sold off the premises during the last 12 months of the tenancy. The clause was regarded as a penalty because at the time hay was worth five shillingShillingThe shilling is a unit of currency used in some current and former British Commonwealth countries. The word shilling comes from scilling, an accounting term that dates back to Anglo-Saxon times where it was deemed to be the value of a cow in Kent or a sheep elsewhere. The word is thought to derive...
s per ton more than straw, and thus the landlord was unjustly enriched to the tune of 5s for each ton of straw sold.
- Dunlop Pneumatic Tyre Co. Ltd. v New Garage and Motor Co. Ltd. [1915] AC 79 — The House of LordsHouse of LordsThe House of Lords is the upper house of the Parliament of the United Kingdom. Like the House of Commons, it meets in the Palace of Westminster....
decided that a liquidated damages clause would be considered a penalty and therefore unenforceable where the sum to be paid by the defendant was 'extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be provided to have followed from the breach.'
- Bridge v Campbell Discount Co. Ltd. [1962] AC 600 — A customer bought a car under a hire purchaseHire purchaseHire purchase is the legal term for a contract, in this persons usually agree to pay for goods in parts or a percentage at a time. It was developed in the United Kingdom and can now be found in China, Japan, Malaysia, India, South Africa, Australia, Jamaica and New Zealand. It is also called...
agreement, paid the initial and first payments and then cancelled the agreement. The company tried to recover large sums specified in the contract for cancelling the agreement, but the court decided these were excessive and constituted a penalty, making them unenforceable.
- Murray v Leisureplay (2004) — A former employee of Leisureplay was sacked and attempted to claim three years' salary, as outlined in his contract of employment. The court decided this was excessive and constituted a penalty, therefore he was not entitled to this level of damages.
The OFT ruling
In 2006 the Office of Fair TradingOffice of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
investigated the charges being imposed on customers of credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
companies. In its report, the OFT said that many of their default charges were unlawful, as they constituted unjust enrichment. It stated that it would act upon receiving notice of any charge over £12 as a penalty, and therefore unlawful http://www.oft.gov.uk/News/Press+releases/2006/68-06.htm. However, the report also specifically stated that the OFT did not necessarily consider £12 a fair charge, and that this would be up to a court to determine. It suggested that the £12 "cap" was intended as an initial step towards fair practice and compliance with the law. Whether or not an individual charge constituted a penalty fee would be based on the established legal precedent that the only cost recoverable would be actual costs incurred.
The credit card companies have so far failed to produce evidence of their actual costs to the OFT, instead insisting that their charges are in line with policy and information provided to customers. A report in produced in October 2006 by the Competition Commission
Competition Commission
The Competition Commission is a non-departmental public body responsible for investigating mergers, markets and other enquiries related to regulated industries under competition law in the United Kingdom...
on banking in Northern Ireland stated that "[c]harges are a significant source of revenue for the banks on [personal cheque accounts] . [Bank name omitted] said that increased unauthorized overdraft fees were part of the strategic imperative to turn the PCA into a profitable business over time."
Many customers have acted upon the ruling of the OFT, in particular as the report explicitly states that while the investigation was into default charges levied towards credit card customers, there is no reason why the same principle should not extend to personal banking. Some have successfully demanded the return of penalty charges for returned cheques, direct debits and unauthorised overdraft charges. Campaigners argue that the current regime of fees is well beyond the cost of sending a computerised letter if indeed any correspondence is sent at all. Frequently the charges are applied without any notification to the account holder other than when it appears as a transaction in their bank statement.
Recovery
In order to recover charges imposed by the banks and credit card companies, many customers have filed cases with the small claims courtSmall claims court
Small-claims courts have limited jurisdiction to hear civil cases between private litigants. Courts authorized to try small claims may also have other judicial functions, and the name by which such a court is known varies by jurisdiction; it may be known as a county or magistrate's court...
. In England and Wales, customers can claim back money that has been taken from their accounts up to 6 years ago, in line with the Limitation Act
Limitation Act
Limitation Act is a stock short title used for legislation in the United Kingdom which relates to limitation of actions.The Bill for an Act with this short title may have been known as a Limtation Bill during its passage through Parliament....
. Theoretically, a claimant may be able to claim back charges incurred longer than 6 years ago if he can demonstrate he was unaware that the company was acting unlawfully, though this has yet to be tested in a court. In Scotland, the limit is up to 5 years.
So far, no bank or credit card company has ever turned up to defend itself in court at an actual trial
Trial
A trial is, in the most general sense, a test, usually a test to see whether something does or does not meet a given standard.It may refer to:*Trial , the presentation of information in a formal setting, usually a court...
, save one occasion by NatWest, preferring to settle out of court, often days before the case is about to be heard.