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Old 14-05-2010, 02:53 PM
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X, Y and Z v THE BANK




_____________________________
O P I N I O N
_____________________________





1. In Office of Fair Trading v Abbey National and Others [2009] EWCA Civ 216 Andrew Smith J and the Court of Appeal held that bank charges levied on personal account holders could be assessed as unfair under regulation 5(1) of the Unfair Terms in Consumer Contract Regulations 1999 SI 1999/2083(the 1999 Regulations) as they did not relate to the adequacy of the process or remuneration as against the goods and services supplied in exchange within the meaning of regulation 6(2)(b) of the Regulations.

2. The decision of the Court of Appeal was subsequently reversed by the Supreme Court.

3. This action is brought by a group of individual Bank customers against their Bank and makes similar points as in the Abbey National case save that additional arguments are raised and some of the arguments are different. Further in this case an application for a Reference to the European Court should be made under Article 234 at an early stage of the proceedings.

Regulation 5(1)

4. Regulation 5(1) of the 1999 Regulations allows for the assessment of all standard form terms and conditions in contracts between consumers and sellers/suppliers. The assessment is one of “unfairness”, which is defined by Regulation 5(1): "A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.”

5. Schedule 2 to the 1999 Regulations gives an indicative and non-exhaustive list of terms which may be considered unfair.

Regulation 6(2)

6. The issue depends on the correct interpretation of the regulations (in its European context) and the application of Regulation 6(2) of the 1999 Regulations. Regulation 6(2) is as follows:
"In so far as it is in plain intelligible language, the assessment of fairness of a term shall 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.”

The Issue

7. The issue in the Abbey National case was:
"That issue is whether the Relevant Charges constitute ‘the price or remuneration, as against the services supplied in exchange’ within the meaning of the Regulation. If they do not, the attack on the fairness of the terms that is open in the OFT will not be circumscribed by Regulation 6(2)(b). If they do they will still be open to attack by the OFT on the ground that they are ‘unfair’ as defined by Regulation 5(1), but that attack cannot be founded on an allegation that the Relevant Charges are excessive by comparison with the services which they purchase, for that is forbidden by Regulation 6(2)(b).
(see para 57 of Lord Phillips judgment)

8. Lord Walker defined the issue as:
"Whether as a matter of law the fairness of Bank charges levied on personal current account customers in respect of unauthorised overdrafts (including unfair item charges and other relevant charges as described below) can be challenged by the respondent, the Office of Fair Trading (the “OFT”) as excessive in relation to the services supplied to the customers.”
(para 3 of his judgment)

9. The Supreme Court decided that the charges set out under the Relevant Terms constituted monetary consideration for the package of banking services supplied to personal current account customers. The fact that the charges were contingent and the majority of customers did not incur them was irrelevant.

Interpretation

10. The 1999 Regulations implement Council Directive 93/13/EEC of 5 April 1993. The Directive should be used as an aid to interpretation of the Regulations.

11. Article 1 is the approximation provision. It is submitted that the way the Directive has been implemented in Member States can be of relevance to the interpretation of the Directive and Regulations.

12. Article 5 provides inter alia that “the interpretation most favourable to the consumer shall prevail”. Articles 4 and 6 are also of relevance to interpretation.

13. Some of the Recitals in the Directive also have relevance. By Regulation 7(2) of the 1999 Regulations:
“If there is doubt about the meaning of a written term, the interpretation which is most favourable to the consumer shall prevail …”

14. The general effect of these aids to interpretation is that the purpose of the Regulations is to protect the consumer from the unfairness of the supplier/seller. Their purpose is not to ensure “a level playing field” but to protect consumers.

15. It is a fact that the Supreme Court refused to make a reference under Article 234 and largely ignored the European aspect to the legislation.(see later).

16. The burden of proving that the Bank is entitled to the protection of regulation 6(2)(b) rests upon the Banks. Further and in any event since the Directive and Regulations were enacted to protect consumers, priority should be given to the course of action which most favours the interests of consumers.

17. The Regulations and Directive should not be “broadly interpreted” and should cover only terms “falling squarely within it”. Further a provision prescribing the consequences of default “plainly does not fall within it”.

18. The full citation from Lord Bingham in the House of Lords decision in Director General of Fair Trading v First National Bank PLC [2001] 1 AC 481 is as follows:
"The object of the Regulations and the Directive is to protect consumers against the inclusion of unfair and prejudicial terms in standard form contracts into which they enter, and that object would plainly be frustrated if Regulation 3(2)(b) were so broadly interpreted as to cover any terms other than those falling squarely within it. In my opinion the term, as part of a provision prescribing the consequences of default, plainly does not fall within it.”

19. Later in that paragraph Lord Bingham referred to the term as an “ancillary provision”.

20. In the First National Bank plc case (above) Lord Steyn said that “In any event, regulation 3(2) must be given a restrictive interpretation”. The full citation is as follows:
"Clause 8 of the contract, the only provision in dispute, is a default provision. It prescribes remedies which only become available to the lender upon the default of the consumer. For this reason the escape route of Regulation 3(2) is not available to the bank. So far as the description of terms covered by Regulation 3(2) as core terms is helpful at all, I would say that clause 8 of the contact is a subsidiary term. In any event, Regulation 3(2) must be given a restrictive interpretation. Unless that is done Regulation 3(2)(a) will enable the main purpose of the scheme to be frustrated by endless formalistic arguments as to whether a provision is a definitional or an exclusionary provision. Similarly, Regulation 3(2)(b) dealing with ‘the adequacy of the price or remuneration’ must be given a restrictive interpretation. After all, in a broad sense all terms of the contract are in some way related to the price or remuneration. That is not what is intended.”

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21. My Instructing Solicitors have drawn attention to the line of ECJ decisions which establish that when dealing with Directive 93/13EC there is a duty on the Court of any Member State to investigate the fairness of any contractual term affecting a consumer. In other words, it is not for the consumer to raise the issue of unfairness; it is for the court to do so. This interpretation gives full weight to the protection of the consumer emphasised by the recitals.

22. These authorities also establish that the burden of proving the unfairness rests on the seller or supplier and not on the consumer. These principles were accepted in a number of authorities including “The Oceano” (C-240/98), Confidis SA (C-473/00), Pannon GSM ZRT (C0243/08).

23. Of particular importance is to adduce evidence as to the practice in other Member States when implementing Directive 93/13EC. This would possibly open up a new area of attack. Lord Walker said:

“But this decision is not the end of the matter, as Lord Phillips explains in his judgment. Moreover Ministers and Parliament may wish to consider the matter further. They decided, in an era of so called ‘light touch’ regulation, to transpose the Directive as it stood rather than to confer the higher degree of consumer protection afforded by the national laws of some other Member States. Parliament may wish to consider whether it revisit that decision”.

24. Lord Phillips envisaged the customers taking a different and alternative approach:
"91. I have not found this an easy case and I do not find the resolution of the narrow issue before the Court to be acte claire. I agree, however, that it would not be appropriate to refer the issue to the European Court under Article 234. I do not believe any challenge to the fairness of the Relevant Terms has been made on the basis that they cause the overall package of remuneration paid by those in debit to be excessive having regard to the package of services received in exchange. In these circumstances the basis on which I have answered the narrow issue would seem to render that issue academic. It may be that, if and when the OFT challenges the fairness of the Relevant Terms, issues will be raised that ought to be referred to Luxembourg. That stage has not yet been reached”.

25. The new case for customers should include a challenge to the overall package as contemplated by this extract and fairness should be assessed on this basis. This would import the issue not then relied upon and to which Lord Phillips drew attention. He seems to believe that the inclusion of this point would have made regulation 6(2) more likely the subject matter of a reference.

26. The recitals in the Directive clearly envisage the importance of seeking to ensure consistency between Member States. The position in Europe between Member States regarding the fairness or otherwise of their relevant terms is hardly mentioned by the Supreme Court.

27. The result is that the most relevant and important indications as to the correct interpretation of the Banks’ relevant terms are given scant regard by the Supreme Court. The Supreme Court not only ignored the European aspect but by refusing to make a reference under Article 234 relevant material to which the recitals and other legal rules had drawn attention was ignored.

Construction of regulation 6(2)(b)

28. At least two members of the Supreme Court criticised the judgment of the Court of appeal as being too elaborate. In fact regulation 6(2)(b) can be interpreted quite simply.
29. The material words to be construed are:
“the adequacy of the price or remuneration as against the goods or services supplied in exchange”.

30. The clear intention of these words is to prevent an “unfairness assessment” where the complaint relates to the price of the goods or services supplied.
31. The word “adequacy” refers to the “price or remuneration” being sufficient or satisfactory.
32. The words “as against the goods or services supplied in exchange” are important.
33. The adequacy of the price or remuneration relates to the actual goods or services supplied in exchange.
34. It is the adequacy of the price or remuneration with respect to the goods or services actually supplied by the seller to the consumer which matter.
35. These words are capable of a simple and straightforward interpretation. The subject matter is specific goods or services supplied by a supplier in exchange for a purchaser paying a price and/or remuneration. Two individuals are concerned: a purchaser and a supplier.
36. Construed in this way it is possible to apply the “fairness” test in Regulation 5. It is possible to form a view whether the contractual term “causes a significant imbalance in the parties rights and obligations.
37. The matter only becomes complicated when an attempt is made to try and make the words fit the identifiable banking transactions.
38. In order to accommodate the Bank’s contention the price or remuneration and the relevant goods or services can only be ascertained as part of the Free-if-in-credit banking system. This is a long way from a complaint by a consumer about specific goods he has purchased.

Construction of regulation 6(2)(b) where Bank has taken steps in consequence of default

39. This is where an overdraft facility has been given but the customer is in breach of the same.

40. On these facts there is only one transaction: the grant of the overdraft facility. Terms subsequently introduced as a consequence of the default are not part and parcel of the overdraft facility (see Lord Bingham above and also Lord Steyn). Terms such as those introduced as a consequence of the default do not constitute a new and separate transaction.

41. The Court of Appeal in the instant case focussed on Lord Bingham’s and Lord Steyn’s description of the relevant clause as “a default provision”. The Court also focussed on Lord Bingham’s description of it as “ancillary” and Lord Steyn’s description of it as “subsidiary”.

42. The Court of Appeal held that: “Ancillary or incidental price, remuneration or payment terms will not fall within the exception in Article 4(2) because they do not fulfil the purpose or essential rationale of the exception”.

43. The Court of Appeal then went on to consider whether the Relevant Terms and the Relevant Charges were or formed part of the “essential or core bargain between the parties...” The Court held that “when all the circumstances are taken into account the Relevant Charges are not part of the core or essential bargain”. It is submitted that this is correct.

44. It is submitted that the approach of the Court of Appeal is correct. Lord Walker sought to reject this approach by holding that:
"there is no possible basis on which the Court can decide that some items are more essential to the contract than others”
(see para 39 of his judgment)

45. This statement is misconceived and does not express the principle accurately. Items which are essential to the contract do not have to be identified by comparison with other items. Whether the item is essential or not depends on the nature of the item in its own right and context and not by comparison with other items.

46. All of the items may be described as essential or as not essential. It is not necessary to distinguish between say clothing, blinds or kitchen utensils to see if they are essential. The same applies to services.

47. Further Lord Walker pointed out (para 41 of his judgment) that Regulation 6(2)(b) “contains no indication that only an ‘essential’ price or remuneration is relevant”. However this conclusion is a deduction from reading the provisions in context and is supported by the statements made by Lord Bingham and Lord Steyn in the First National Bank case. Lord Bingham’s response to “falling squarely within it” and his and Lord Steyn’s reference to construing the provision “restrictively” are merely other ways of identifying terms which are essential.

48. None of the members of the Supreme Court were able to deny that this was a “default provision” .

49. In para 44 of his judgment Lord Walker referred to an Article entitled “Good Faith in European Contract Law” by Professor Hugh Collins. The passage quoted:
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(a) Is not in accordance with the legislation and Directive (“the Directive does not require consumer contracts to be substantially fair but it does require them to be clear”).
(b) Whatever may have been the position before the enactment of the Directive – the “conflict” which exists post the enactment is between the protection of consumer rights against the rights of the supplier/seller of goods or services. (see the Articles and Recitals of the Directive).

50. The only point left concerning a conflict between market competition and consumer rights which eventually found its way into the legislation was the reference to the “terms which have been individually negotiated”.

Construction of Regulation 6(2)(b) – Overdraft Charges

51. The banking system in this country operates on the basis of free banking while in credit (so no charges for standing orders, direct debits etc) but it is contended that this is only possible because of the charges imposed on those who are overdrawn. Those who are in credit also forego earning interest.

52. It is argued that this makes overdraft charges part and parcel of the service provided by the bank to its customers. This interpretation looks at the situation from the banks’ point of view – how banks run free banking etc which is within their power and discretion.

53. From the customers’ point of view, the majority of whom are never overdrawn, overdraft charges are a contingency. The customers are not concerned about the charges or how banks are able to provide free banking. To them, overdraft charges are subsidiary to core bank services. The majority are unaffected by overdraft charges directly and benefit indirectly. Customers also fund free banking by losing out on interest when keeping their current accounts in credit.

54. From the customers’ point of view, overdraft charges are not part of the core service provided by the bank. Customers do not have to be concerned about how banks fund the service and run the banks. Overdraft charges are imposed under a separate regime if and when the customer overdraws without prior arrangement.

55. This fits in with what Lord Bingham said in the First National Bank plc case (above).

56. This also fits in with what Lord Steyn said in the same case, namely that the Regulations must be given a “restrictive interpretation”.

57. It fits in with the intention and purpose of the Directive and Regulations – the protection of consumers.

Scope of Regulation 5(1) and the test of fairness

58. The question remains as to the scope of Regulation 5(1), i.e. what is left to challenge? As summarised by Lord Mance in paragraph 95:
"Any assessment based on matters not relating to the appropriateness in amount of the price of remuneration is not excluded by regulation 6(2)(b).”

59. It would follow that a challenge on the basis of the consequences to consumers of the terms, some of which are set out in the instructions, would be assessable for fairness, and could be held to be unfair, namely:

(a) Terms which were not available to the consumer in advance, which results in the consumer becoming irrevocably bound to terms with which they had no real opportunity of becoming acquainted before the conclusion of the contract;

(b) Terms which require the consumer to subsidise the running and/or operation costs of accounts other than that of the consumer;

(c) Terms which gave the banks priority over the consumer’s other debtors with regards to the application and payment of the Relevant Charges to the account;

(d) Terms which gave the banks control over the use of the consumer’s salary or benefits, and allowed for the automatic application of the Relevant Charges, with little or no notice to the consumer;

(e) Terms which forced consumers into an unavoidable cycle of debt, where the Relevant Charges directly or indirectly gave rise to the application of additional charges to the account, without any restriction or limitation.

60. The final point is probably the most compelling, as many individuals have faced serious financial hardship as a result of the charges imposed on them. Indeed, the FSA set up a waiver in respect of bank charges complaints for the banks, but which specifically provided for the handling of cases involving financial hardship (i.e. more than 500 of charges in any given year, amongst other factors). If a regulatory regime was instituted as a result of financial hardship, this supports the contention that the terms caused financial hardship, and are therefore unfair under the Regulations.

61. Although that final point (cycle of debt) is probably the most compelling, it would be considered in conjunction with the other factors already mentioned above and in the instructions.

Lloyds TSB

62. An important point to note is that due to an error on the part of the draftsman for Lloyds TSB, their historic relevant terms and conditions to charging were not included within the main banking contract with consumers. Although they had a leaflet stating “Our Charges”, there was no reference to that leaflet or to any relevant bank charges in the main contract. This raises the question of whether those Terms and Conditions were in fact incorporated. Lloyds TSB argued at first instance that those banks charging terms were included by way of “implication”, but implying such terms not specifically referred to in a regulated Consumer Credit Agreement seems incredibly dubious, at best.

63. As noted by Smith J, at paragraph 445:
"As I explained in paragraph 96 above, all of the Banks now have the right under their standard terms to give customers thirty days’ notice of a change of terms, and it seems probable that many of them used a comparable power in their previous terms to introduce the Relevant Terms into their existing contracts with individual customers, but there is no clear evidence about this; and indeed in the case of Lloyds’ TSB there is no evidence that it had any such power before its current terms of November 2007, and there is no evidence abo0ut how the Relevant Terms were introduced into its existing contracts.”

Reference

64. The Supreme Court is under an obligation to make a Reference to the European Court of Justice under Article 234 to obtain the correct interpretation of a Directive where it is necessary to enable the Court to give judgment and the point is not acte claire. It is quite clear from a careful consideration of the judgments of the Supreme Court that there were strong reasons for making a Reference. On any view there was a strong European aspect to the case.

65. The first reason for refusing to make a Reference was that to allow a reference to the most senior Court in Europe would cause delay. This would apply to all cases. It is tantamount to denying the parties access to the highest Court. The parties could have been asked whether they wanted a Reference bearing in mind the delay.

66. The second reason relied upon by the Supreme Court is also surprising. It was suggested that a Reference should not be made because the point in issue was “acte claire”. Lord Walker seems to have been acutely aware of the difficulty in relying on this ground for failing to make a Reference under Article 234 when a three Judge Court of Appeal and Andrew Smith J at first instance had come to a contrary view in strong terms to that reached by the Supreme Court. Such a division of judicial judgment would usually suffice for a reference.
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67. Here again Lord Walker was also aware that his justification for not making a Reference might be regarded as “rather unprincipled to take that means of avoiding an important issue of community law”. His final sentence was to refer again to delay: “There is a strong public interest in reviewing the matter without further delay”.

68. Lord Phillips relied upon different grounds for refusing a Reference to the European Court which were equally novel to those relied upon by other Judges of the Supreme Court. I set out the passage in Lord Phillips speech where he deals with the point before indicating the problem with the approach he was commending. His Lordship said: “I do not find the resolution of the narrow issue before the Court to be acte claire. I agree, however that it would not be appropriate to refer the issue to the European Court under Article 234. I do not believe any challenge to the fairness of the Relevant Terms has been made on the basis that they cause the overall package of remuneration paid to those in debit to be excess having regard to the package of services received in exchange”. The courts have not yet considered the issue of fairness.

69. The last matter relied upon for refusing to make a Reference under Article 234 is equally surprising. Lord Walker attempted to draw a distinction between an interpretation of Article 4(2) which was a matter of community law and the application of the Article properly applied to the facts which was a question of national law.

70. He suggested that “we should treat the point as ‘acte claire’.” He conceded, “It may be paradoxical for a Court of last resort to conclude that a point is clear when it is differing from the carefully considered judgments of the very experienced judges who have ruled on it in the lower Courts”.

The Abbey National Case

71. A major problem is to decide what effect the decision of the Supreme Court in OFT v Abbey National [2009] EWCA Civ 216 has on any future claims brought by customers.

72. Two matters arise from a close examination of the Abbey National case. The first is that it is possible to extract the reasoning of the Court and set the ambit of the decision. However there is a second point. A close examination of the decision reveals that the members of the Court identified specific points which could be helpful to the customer’s cases.

73. The decision of the Supreme Court binds all other Courts and it will be difficult to overturn any parts of the judgments of the Supreme Court which are directly relevant to issues raised in the customer litigation. It might be possible to do so by proving that the facts are different or that some case law was overlooked. There is one other possibility.

74. A careful review of the judgments of the Supreme Court indicate that a number of questions did arise and were commented upon by the members of the Court. The reason why no concluded view was reached on these points was because the Supreme Court was limited to deciding certain agreed issues only or because none of the parties took the point.

75. The result is that it is a profitable exercise to review the judgments in the Abbey National Case to identify these points which were mentioned by the Court but about which they could not make a final decision in the judgment. These points can now be raised in the customer litigation where appropriate.

76. The Supreme Court did not have the task of deciding whether or not the system of charging current account customers was fair. The Supreme Court had to decide whether the OFT could challenge the charges as being excessive in relation to the services supplied in exchange.

77. Lord Phillips took the view that even if such a challenge was not possible it might still be open to the OFT to assess the fairness of the charges according to other criteria. This would equally apply to a customer.

78. The OFT has decided not to take any further part in the proceedings against the banks but the points that the OFT could have taken can be taken by customers in their actions.

79. The formal issue in the Abbey National case(above) was not whether the bank charges for unauthorised overdrafts were “fair” but whether the OFT could commence an investigation into whether they were or were not “fair”.

80. This issue involved Regulation 6(2)(b) of the 1999 Regulations and gave rise to the question posed by Lord Phillips:
“Whether the relevant charges constitute the price or remuneration, as against the services supplied in exchange”.

81. If the answer to this question was “no” then the attack on the fairness of the terms was not caught by Regulation 6(2)(b). If the answer was “yes” then an attack on the grounds of unfairness as defined by regulation 5 was possible but that attack could not be founded on an allegation that the relevant charges are excessive by comparison with the services which they purchase “for that is forbidden by Regulation 6(2)(b)”.

82. Lord Mance in his judgment closely followed Lord Phillips’ definition and that description became the ratio of the case i.e. the actual decision.

83. This approach left certain points undecided. One such example was explained by Lord Phillips in paragraphs 59-61 of his judgment.

84. This followed from the rejection by Andrew Smith J of the Bank’s contention that a term of a contract that provided the “price or remuneration” for “goods or services supplied” was absolutely exempt from assessment for fairness by reason of Regulation 6(2). This was called the “excluded term” construction of the regulation.

85. Regulation 6(2) precluded assessing a price term for fairness by reference to its adequacy or payment for the goods or services provided in exchange. However Lord Phillips pointed out that this did not preclude assessing a price term for fairness “according to other criteria”. This was described as the “excluded assessment” construction of the Regulations.

86. The result of this was indicated by Lord Phillips in paragraph 61 of his judgment:
“As it is, if the Banks succeed on the narrow issue, this will not close the door on the OFT’s investigations and may well not resolve the myriad cases that are currently stayed in which customers have challenged relevant charges”.

87. Lord Phillips pointed out another effect in paragraph 62-64 of his judgment.
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88. He said that it seems likely that many customers who have challenged the relevant charges have done so on the basis that they are excessive for the individual services to which they relate. They have treated the relevant charges as being levied in exchange for these services. The OFT had contended that the relevant charges are out of all proportion to the cost of providing the services to which they relate. The banks contended that the relevant charges are simply part of the payment in exchange for a global package of services. Lord Phillips went on to draw attention to the inferences following from this namely that “the attack based on the disparity between the cost of providing the services that trigger the relevant charges and the amount of the relevant charges is based on a false premise and does not in fact involve assessment of fairness that relates “to the adequacy of the price or remuneration as against the goods or services supplied in exchange”.

89. Lord Phillips went on to point out that Andrew Smith J was aware of the point and had said:
(a) that the whole package argument does not engage the policy of the Directive or the 1999 Regulations for exempting the fairness of the relevant terms, from assessment:
(b) that Andrew Smith J was “far from convinced” that an assessment of part of the price or remuneration would ever be covered by regulation 6(2)(b).

90. This is an example of an argument helpful to the OFT upon which the Court could not make a finding because the argument was never run by the OFT. As Andrew Smith J said at page 400 of his judgment “but this is not an argument advanced by the OFT I say no more about that”.

91. Lord Phillips could not come to any determinative view because:
“No attack has yet been made, however on the level of the Bank charges overall”.

92. These are all points left unresolved by the Supreme Court because the Court was only asked to deal with a specific and limited question. There was also a failure by the OFT to plead or argue certain points arising. I do not say this in critical sense because this was really due to the decision to ask the Court only to decide a certain specific and limited question.

93. There are other examples of which brief mention should be made.

94. In paragraph 73 of his judgment Lord Phillips made further comments following from the narrower issue only being before the Court.
He said that the narrow issue raised by the appeal “is only relevant or part of the wider issue that will arise if and when the relevant terms are challenged as being unfair”.

95. At that stage the question may arise whether the terms are being challenged on the ground that the relevant charges are excessive having regard to the services that are provided in exchange for them. The Court will then have to decide whether any, and if so what, services are provided in exchange for the relevant charges as a stepping stone to deciding whether the challenge is one precluded by Regulation 6(2). This will involve the Court having to consider the role played by the relevant charges having regard to all the relevant facts not just those facts that are reasonably within the knowledge of the customer.

96. Andrew smith J had held that it was impossible to say that each charge was in exchange for the event that triggered it. The same conclusion could be drawn if it had been pleaded by a “reasonably informed customer who applied his mind to the question” As an illustration to support this view Lord Phillips referred to the Barclay’s “Paid Referral Fee”

97. This lead Lord Phillips to make the following comment
“I agree with Andrew Smith J that a careful analysis of the transactions giving rise to the obligation to pay the relevant charges leads to the conclusion that they are not the prices paid in exchange for the transactions in question”.

98. The actual finding by the Supreme Court was that:
“ the relevant charges are, as the Bank’s submit, charges that they require their customers to agree to pay as part of the price or remuneration for the package of services that they agree to supply in exchange”

99. In fact these arguments lead on to another point of principle which the Supreme Court did not consider – this arises from the personal relationship between the customer and the supplier – Bank.

100. The word “exchange” surely implies that there must be a connection between the bank and the customer in relation to the services supplied. This involves a proper construction of the agreement between them. The services must be supplied to the consumer in such a way that the Court can reach a conclusion as to whether the contractual term “causes significant imbalance in the parties rights and obligations arising under the contract, to the detriment of the consumer.(Regulation 5(11).

101. If it is necessary to consider the contractual provisions of an individual consumer with his bank then it is difficult to see how the “Free-if-in-Credit banking” could ever be considered “fair” so far as the individual customer is concerned.

102. Many of the “fairness” cases depend on their own facts although there will probably be groups of cases where the facts relied upon are essentially the same. However there are points of general importance. Lord Phillips mentioned one such issue namely that it might be “open to question whether it is fair to subsidise some customers whose accounts always remain in credit by levies on others who experienced events they did not forsee when they opened their accounts”

103. Another aspect of “unfairness” may relate to the lack of transparency on the part of the banks in their relationship with customers. It may well be that this will be a major argument against the Banks. It did not arise in the Abbey National case.

104. I have spent a long time studying not only the judgments of the Supreme Court in the Abbey National case(above) but also the judgments of the Court of Appeal and of Andrew Smith J. at first instance. There are substantial arguments to support the view that the judgments of the Court of Appeal should be preferred. There are also good grounds for holding that it should be possible to take unfairness cases successfully to court despite the Abbey National case. The problem is that the court may just follow the arguments in the Abbey case and changes in the submission or new arguments on different grounds might make no difference. I believe that many of the new submissions will require a fresh decision ( see also paragraph 73 above).

105. There are several general points.

106. There is attached to this Opinion a separate paper dealing with unfairness claims. These cases cover wide areas but many can be presented without running foul of regulation 6(2)(6)

Conclusion
107. The only way forward is for the customers to commence or continue fresh proceedings against individual banks.
108. I have pointed out that a proper examination of the decision of the Supreme Court leads to the conclusion that the Judges in that case seem to agree that their decision did not prevent customers proceeding with unfairness claims. The Court was dealing with a different point.
109. I have examined some of the points which arise in the actions brought by customers and demonstrated that they have a viable claim. However fresh steps need to be taken.

110. We need to introduce fresh grounds in the new proceedings.

111. We need to obtain evidence from other member states as to their comparable legislation to Regulation 5 and in particular Regulation 6(2).

112. We need to introduce points referred to by the individual judges in the Supreme Court as well as points from the judgment of the Court of Appeal. I consider the Supreme Court seriously underestimated the strength of the Court of Appeal judgment.

113. We need to introduce the points made by my instructing solicitors in their instructions to me and widen the allegations as contemplated by Lord Phillips to improve the chances of obtaining a Reference.

Practical Matters
117. I am instructed that there are probably thousands of cases brought by bank customers and how this is managed presents of itself a major problem. I gather that the Banks are well organised.
The general view seems to be to establish a Representative action under CPR 19.7. However there are problems in taking that course including whether these actions are suitable or qualify.
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Old 14-05-2010, 02:58 PM
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118 For obvious reasons it would be appropriate to take a few individual cases as test cases. In my experience any form of group action is extremely expensive and cumbersome to handle.

119. In my view the way forward would be to hold a meeting of interested parties – everyone paying a modest sum to cover expenses of providing accommodation. All of the practical issues could then be discussed. A committee should be established just for the first meeting.

ANTHONY SCRIVENER Q.C.
21st April 2010

2-3 GRAY’S INN SQUARE
GRAY’S INN
LONDON WC1R 5JH
X, Y and Z v THE BANK


Reference Para 106 of the Opinion



In the Matter of Bank Charges

___________________________________________
Note on Good Faith and Themes of Unfairness
___________________________________________


1. This note supplements the opinion of Anthony Scrivener QC dated 21 April 2010, and is referred to in paragraph 106 of that opinion. This note deals with issues in respect of good faith and sets out provisional themes of ‘unfairness’ under the 1999 Regulations. It is expected that those ‘themes’ will be further expanded in the coming conference.

2. Regulation 5(1) of the 1999 Regulations allows for the assessment of all standard form terms and conditions in contracts between consumers and sellers/suppliers. The assessment is one of ‘unfairness’, which is defined by Regulation 5(1):

“A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.”
(emphasis supplied)

3. The criteria for the assessment of the issue of “good faith” was considered by Andrew Smith at the first instance of the bank charges test case. The banks had originally sought a declaration to the effect that provided the process or procedure by which the contract is drawn up has been done in good faith, then the term cannot be considered unfair. Smith J. declined to give such a declaration for a number of reasons, but did consider the question of “good faith” in some detail, drawing heavily on the decision of the House of Lords in First National Bank (the following is a lengthy extract of the judgment of Smith J., but it is core to this note and an understanding of the issue of ‘good faith’):
“437...The relief sought by the Banks about the effect of the words “contrary to the requirement of good faith” underwent some changes in the course of the hearing. In the end they sought declarations that:
i) “It is a necessary, but not a sufficient, precondition to any finding of unfairness under Regulation 5(1) to the 1999 Regulations that the contractual terms under consideration are contrary to the requirement of good faith.”
ii) “The Relevant [Bank] Terms and Relevant [Bank] Charges could not be found to be unfair within the meaning of Regulation 5(1) of the 1999 Regulations by virtue only of giving rise to a significant imbalance in the rights and obligations of the parties, without reference to the issue of good faith.”
iii) “If the OFT seeks any relief from the Court based upon a contention that the Relevant Terms and Relevant Charges are unfair within the meaning of Regulation 5(1) of the 1999 Regulations, one of the matters which it will have to establish is that the bank has not dealt fairly and openly with its customers as regards the process by which the Relevant [Bank] Charges were agreed by [or otherwise became part of the contract between] the bank and its customers.”
...
Although in the third declaration the word “customers” (plural) is used, it is not disputed that the 1999 Regulations are concerned with the fairness of terms between the seller or supplier and an individual customer: see paragraph 16.)

438. As far as the first declaration is concerned, the OFT does not dispute that it is a necessary, but not a sufficient, precondition to any finding of unfairness under Regulation 5(1) that the terms under consideration are contrary to the requirement of good faith. There is also no issue that the Relevant Terms and Relevant Charges could not be found to be unfair within the meaning of Regulation 5(1) by virtue only of giving rise to a significant imbalance in the rights and obligations of the parties, without reference to the issue of good faith.

439. In the First National Bank case the House of Lords explained, in the context of the facts of the case, about the requirement of good faith and its part in an assessment of fairness. Lord Steyn (cit sup at para 36) referred to the “twin requirements of good faith and significant imbalance”, and went on (at para 37) to say that, “there is a large area of overlap between the concepts of good faith and significant imbalance”. As for the requirement of good faith itself, he said this (at para 36): “The examples given in the Schedule 3 [to the 1994 Regulations, that is to say the “greylist”] convincingly demonstrate that the argument of the bank that good faith is predominantly concerned with procedural defects in negotiating procedures cannot be sustained. Any purely procedural or even predominantly procedural interpretation of the requirement of good faith must be rejected”. Lord Millett (at para 54) warned against looking for a single test for what constitutes unfairness as defined by the 1999 Regulations. Lord Bingham (at para 17) said this:
“A term falling within the scope of the Regulations is unfair if it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer in a manner or to an extent which is contrary to the requirement of good faith. The requirement of significant imbalance is met if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour. This may be by the granting to the supplier of a beneficial option or discretion or power, or by the imposing on the consumer of a disadvantageous burden or risk or duty. The illustrative terms set out in Schedule 3 to the Regulations provide very good examples of terms which may be regarded as unfair; whether a given term is or is not to be so regarded depends on whether it causes a significant imbalance in the parties’ rights and obligations under the contract. This involves looking at the contract as a whole. But the imbalance must be to the detriment of the consumer; a significant imbalance to the detriment of the supplier, assumed to be the stronger party, is not a mischief which the Regulations seek to address. The requirement of good faith in this context is one of fair and open dealing. Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. Appropriate prominence should be given to terms which might operate disadvantageously to the customer. Fair dealing requires that a supplier should not, whether deliberately or unconsciously, take advantage of the consumer’s necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position or any other factor listed in or analogous to those listed in Schedule 2 to the Regulation. Good faith in this context is not an artificial or technical concept; nor, since Lord Mansfield was its champion, is it a concept wholly unfamiliar to British lawyers. It looks to good standards of commercial morality and practice. Regulation 4(1) lays down a composite test, covering both the making and the substance of the contract, and must be applied bearing clearly in mind the objective which the Regulations are designed to promote”
440. These observations were made by the highest authority by reference to the facts of the specific case before them. It is not appropriate for me, asked to consider in the abstract and without reference to specific facts whether the Relevant Terms satisfy the requirement of fairness, to seek to explain or amplify what they said. As I see it, I am effectively being invited by the first and second proposed declarations to add a gloss to the 1999 Regulations while resolving nothing in dispute between the parties, and this would be at best valueless and at worst confusing. I decline to grant these declarations.
441. It is apparent that the Banks’ third proposed declaration is drafted on the basis of Lord Bingham’s speech (with which, as I have said, all of the other Law Lords expressed their agreement) but nothing would be gained from me making a declaration if it is designed simply to endorse what he said. I would be the more reluctant to make the proposed declaration because on any view it is difficult fully to define the requirement of good faith, a concept which is to be given an autonomous interpretation in light of the recitals to the Directive (and in particular the 16th recital) but at the same time has different connotations in the law of different member states: see Lando & Beale’s Principles of European Contract Law, Notes to Article 1:201 (combined and revised 2000). As Mr Rabinowitz observed, there is room for debate as to quite what would be covered by Lord Steyn’s expression “procedural defects in the negotiating process”, and it seems to me that equally the expression in the proposed declaration “as regards the process by which the Relevant … Charges were agreed by … the bank and its customers” would give rise to uncertainty. For example, the 16th recital to the Directive states that in making an assessment of good faith, particular regard shall be had (among other things) to “the strength of the bargaining position of the parties”, but the strength of the parties’ bargaining position in itself (and in contradistinction from its exploitation by the stronger party) is not obviously part of the “procedure” or the “process” whereby the contract was made.
4. Smith J. went on to consider the time at which the question of fairness must be addressed, and concluded in line with Lord Bingham in First National Bank that “fairness must be judged as at the date the contract is made, although account may properly be taken of the likely effect of any term that is then agreed and said to be unfair”. This gave rise to the ancillary issue of amended terms and conditions as happened from time to time with the various current accounts, and how the issue of timing of the formation of the contract (and therefore the assessment of good faith) was to take place. Since the parties had not addressed that issue in written submissions, and since the banks requested that no decision be made on that point until they had decided their own position, Smith J. declined to grant the declaration sought. Smith J. then went on to state:
446. The focus of the third proposed declaration is that the Banks’ wish to establish that, provided a Bank acted properly (as it was put in Mr Rabinowitz’s opening submissions) with regard to the manner in which it obtained its customer’s agreement to the terms under scrutiny, the requirement of good faith is satisfied and any enquiry as to how the Bank acted thereafter and any enquiry as to whether any contractual term causes a significant imbalance in the parties’ rights and obligations arising under the contract would be superfluous. They argue that this follows from a proper understanding and application of the speeches in the First National Bank case and the decision of the Court of Appeal in Bryan & Langley v Boston, [2005] EWCA Civ 973.
447. I have serious doubts whether in any case it would be appropriate to make a declaration of this kind in abstract terms and without regard to the facts of any particular case, but in any event I am not willing to make one without forming some view as to when, for the purposes of the declaration that the Banks seek, the process of making the contract containing the Relevant Terms is to be taken to be complete. Otherwise, I am not in a position to consider the implications of deciding that subsequent conduct cannot bear upon whether the requirement of good faith is satisfied, and otherwise the meaning of any declaration that I might make would be inappropriately obscure.
448 For these reasons I shall make none of the declarations about the requirement of good faith that the banks seek.
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Old 14-05-2010, 02:58 PM
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5. From this, it becomes clear that the question of “good faith” is one that will need to be considered and assessed in some detail in any proceedings brought against the banks. However, much assistance can be drawn from the guidance by Lord Bingham in First National Bank which was considered by Smith J above.
The requirement of good faith in this context is one of fair and open dealing. Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. Appropriate prominence should be given to terms which might operate disadvantageously to the customer. Fair dealing requires that a supplier should not, whether deliberately or unconsciously, take advantage of the consumer’s necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position or any other factor listed in or analogous to those listed in Schedule 2 to the Regulation.
6. In my view, that speech will be key to any claim for unfairness in the context of good faith. Emphasis should be given to “concealed pitfalls or traps” and the “appropriate prominence” of the relevant terms. Perhaps key to the entire argument of unfairness will be the banks taking advantage of the consumer’s “necessity, indigence...weak bargaining position or any other factor listed in or analogous to those listed in Schedule 2 to the Regulation.”
7. The question of good faith is certainly one which will need to be considered in the European context, and comparisons from other jurisdictions should be sought.
8. In light of the extracts above on “good faith”, the following broad themes of unfairness can be drawn:
i. Imbalance/Weak Bargaining Position
ii. Concealment/Lack of Prominence
iii. Necessity
iv. Indigence/Hardship
v. Cycle of debt/Consequences for the Consumer
These themes can be used individually or combined together to attack the Relevant Terms as being unfair.
i. Imbalance/Weak Bargaining Position
9. As noted by the OFT, current accounts are the gateway to the consumer markets. In particular, the near-universal practice of depositing a salary or other income into a current account and then using those funds by way of debit card, cash withdrawals, cheques, direct debit or standing order is the norm for the vast majority of consumers in the UK. Bank accounts are integral to 21st Century life, and in that respect, can be considered a utility. Well over 90% of adults in the UK hold at least one bank account, and the majority of consumers would consider a bank account a necessity.
10. In this respect, there is already the beginning of an imbalance between the parties, to the detriment of the consumer. The average consumer needs a bank account, and historically there has been little difference between the standard terms of the various banks, particularly in respect of charging structure and charging levels. Furthermore, the balance of power would inevitable be shifted towards a company who has access to, and a great level of control, over a consumer’s finances, through loans, overdrafts, and charges which can appear to be discretionary. In particular, a bank can alter any arranged overdraft as it sees fit (subject to notification), and a frequent problem has been where a consumer’s overdraft facility has been unilaterally lowered by the bank, which the consumer is unable to reduce, and which results in additional charges being levied.
Example: X v Yorkshire‏ Bank Plc: Despite already being in financial difficulty, the overdraft facility on X’s current account was reduced by 100 per month from October 2001, resulting in additional charges being levied. These charges then made it even more difficult for Janie to stay within the ever-decreasing overdraft facility.
Example: X v Lloyds TSB: The amount owing on an overdraft facility on the current account was wrapped up within a loan agreement with Lloyds TSB, which was conditional on Payment Protection Insurance (PPI) being paid. The miss-selling of PPI on such loan agreements has been much criticised, and has since become regulated.
11. The Relevant Terms are particularly onerous as they give the banks priority over the consumer’s other debtors with regards to the application and payment of the Relevant Charges to the account, and as such give rise to a serious imbalance due to a complete lack of control by the consumer. The consumer has no control as to when or how the charges are paid, as they are automatically taken from the account. The consumer has no means to “opt-out” of the charges. The consumer has no means of prioritising their essential bills over the charges.
Example: X is retired and lives on a disability pension. His first financial priority is to maintain payments on his mortgage agreement so that he does not lose his home. Once charges have been incurred on the account, Mr X has no means of getting the account back into order. Aside from the cycle of debt that this creates, payments towards his Mortgage are thereafter refused as the Charges take priority. Mr X’s house is then subject to possession proceedings by the mortgage company.
12. It should be noted that benefits and pensions are normally protected from any form of assignment. The legislation is designed to protect the recipient from themselves and/or unscrupulous third parties, so as to ensure a minimum income for the intended recipient to meet their basic needs. However, once such benefits are paid into a current account, they no longer benefit from such statutory protection, and the banks are able to access them without any concern for the basic needs of the intended recipient.
ii. Concealment/Lack of Prominence
13. The Relevant Charges account for a significant proportion of the banks’ income, more than loans and credit cards combined. Some 2.56bn was received (or taken) by the banks in 2006, and there has been a trend for such charges to have increased significantly since 2000. Approximately 12million bank accounts are subject to charges each year, which amounts to roughly 1 in 4 consumers with a bank account. However, the Relevant Terms, which one could argue is the principle manner in which consumers pay for current accounts, are not given sufficient prominence by the banks. In some cases, the relevant terms are handed out as an ‘afterthought’ to the consumer once they have opened a bank account.
14. There is a strong argument to be made that where the principle source of income for the banks, and where the biggest expenditure for the consumer, is not given sufficient prominence, then there has been a lack of good faith on the part of the banks. This is reflected by the OFT investigation into current accounts that revealed that the majority of consumers did not know the level of the Relevant Charges, and were not aware of the circumstances in which they would be levied. There is a strong argument in favour of allowing consumers to know the true cost of the services provided. There has been significant reform in this field following on from the investigation by the OFT into current accounts.
15. Although the lack of prominence will be unlikely, in my view, to form a basis for a lack of good faith in itself, it will support the other “themes” in demonstrating an overall lack of good faith and unfairness.
iii. Necessity
16. Consumers will often have to pay essential bills, such as gas and electricity, council tax, and mortgage repayments, by direct debit or standing order. These monthly instructions are a frequent trigger of the relevant charges, since a consumer will have little choice but to try and pay an essential bill (assuming they are even conscious of the date of the payment and the amount to be paid). A consumer will find themselves in a difficult financial position due to illness or becoming unemployed.
17. In some cases, the current account will have a linked loan with the same bank, where the monthly payments will be transferred regardless of whether there are sufficient funds, and the consumer has no way to stop or cancel those payments
Example: X v Lloyds‏ TSB: In September 1999 X left employment due to Illness and was signed off as entitled to long-term sickness benefit, and contacted Lloyds TSB to inform them of the situation, subsequent charges imposed regardless of X’s situation. In July 2005 the overdraft was converted into an unaffordable loan at the bank’s behest. In March 2006 X was declared bankrupt.

Example: X v Lloyds TSB: Pike is a single mother living on benefits. Her overdraft facility has been incorporated into a loan agreement with Lloyds TSB. She can no longer meet those payments, and the associated charges prevent her from ever coming back within her overdraft facility. Lloyds seek repayment of both the overdraft facility and the loan agreement. Meanwhile, X is unable to pay her council tax, and bailiffs on behalf of the local council obtain a court order to enter her property and sell her possessions.

iv. Indigence/Hardship
18. The very essence of the proposed action boils down to the banks taking excessive charges in circumstances where a consumer does not have sufficient funds. Although “insufficient funds” is frequently used to describe the situation, “financial hardship” would be a more accurate and more fitting description for a significant number of cases. These charges are often borne by those consumers who least can afford to pay them. This leads to a cycle of debt, and can ultimately lead to bankruptcy and possession proceedings against the family home; see above.
Example: There are almost too many examples to list. Almost every one of the thousands of cases listed on consumer websites and already brought in the courts are cases of hardship. As a flavour, however:
X v Lloyds‏ TSB: X has 17,000 of debts with council tax and rent arrears and asked for help under hardship guidelines of the waiver and the banking code at that time. Her income was solely from benefits after her relationship with her partner broke down. Her ex-partner was filing for bankruptcy, and at the same time she was expecting a baby. Lloyds TSB continued to impose charges on the current account subsequent to the hardship request to the amount of 335 in six months. Lloyds TSB also took over 600 from the account in one month to pay her Lloyds TSB credit card, despite having an arrangement to repay the credit card at 10 per month.



v. Cycle of debt/ Consequences for the Consumer
19. One of the biggest criticisms from consumers in respect of the Relevant Charges is the fact that they create a cycle of debt, from which the consumer cannot escape. The term “crippling” is often used by consumers to describe the nature of the charges. If a consumer is in financial hardship and receives charges as a result, then the consumer is more likely in the following month to be unable to maintain the account within the agreed overdraft facility and will receive further charges as a result. In some cases, such as Rutherford, the amount of charges in any given month could exceed the amount of benefits coming into the account.
20. The level and incidence of charges imposed on some consumers results in a vicious cycle of debt from which they cannot escape. Due to a poor credit rating and an overdrawn account, the consumer will be unable to transfer their existing overdraft facility to another bank, and are to all intents and purposes tied into their current bank. It does not occur to many consumers that they can have a second account with another bank and pay their salary or benefits into that account so as to ‘protect’ their income. Even where a consumer does opt to open a new account with a different bank, the charges will continue to be imposed on the ‘old’ account and the consumer will be pursued for the outstanding amount.
21. In any event, this cycle of debt can often result in severe financial hardship for the consumer, who can be made bankrupt (x), have their home subject to possession proceedings (x) or have their property subject to bailiff action (x).
22. Aside from the aforementioned legal action that is taken against a consumer trapped in a cycle of debt, there is the hardship which can be faced on a day to day basis. Even a cursory browse of consumer forums will show a plethora of cases where the consumer cannot pay for basic food and necessities. The level of stress that this can produce, particularly where the consumer has children to care for, really must be experienced to be believed.
23. Whilst consumers must ultimately have responsibility for their own financial situation, there is a strong argument that consumers must be protected from the banks’ sharp practices of trapping them into a cycle of continuous excessive charges. The banks have made huge profits from exploiting the financial hardship of consumers; the best estimates we have obtained puts that figure at close to 20billion since the introduction of the 1999 Regulations.
24. It should be noted none of the broad ‘themes’ identified above makes any reference to the adequacy of the price or remuneration as against the services provided in exchange. Such ‘themes’ do not fall foul of the current interpretation of Regulation 6(2)(b).

Last edited by nattie : 16-05-2010 at 01:23 PM.
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Old 14-05-2010, 02:59 PM
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Courtesy of Legal Beagles, Hausfield LLP, and Anthony Scrivener, QC.
I thought those with bank charges claims should be aware of this and the legal opinion in full.
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