BBC - Overdrafts are 'core' to banking

Unauthorised borrowing is a central feature of the way current accounts work, the High Court has been told.
Laurence Rabinowitz QC was defending the Royal Bank of Scotland, one of eight lenders accused of levying unfair overdraft charges.

The Office of Fair Trading (OFT) wants the court to rule that it can challenge the lenders' fees under consumer law.

Mr Rabinowitz said overdraft facilities are a "core" feature of accounts and therefore consumer law does not apply.

Seven banks and the Nationwide building society agreed to the test case to clarify their legal position after a mass of litigation, which has seen hundreds of thousands of consumers claim refunds totalling hundreds of millions of pounds.

'Valuable service'

The barrister told the judge hearing the case, Mr Justice Andrew Smith, that the average Royal Bank of Scotland customer went overdrawn without permission three times a year.

He said providing such customers with unarranged credit was a "substantial and valuable service", which was central to everyday banking.

Without it, he argued, customers would not be able to draw on cheques until six days after they had been paid it to allow them to clear.

And if the possibility of unarranged borrowing did not exist, then debit card payments could not be guaranteed by banks.

Retailers would be forced to phone banks to check every transaction before allowing them to be processed.

Under current arrangements, banks will honour payments, even if they are not covered by an account holder's balance, and then charge the customer accordingly.

"What the bank is doing is processing his payment instructions and what the bank is doing is providing the customer with credit - that is indeed providing a service", said Mr Rabinowitz.

Crux

This issue is critical to the banks' defence.

They claim that their unauthorised overdraft charges are fees for a "core" part of the current account product, and not unfair penalties.

As a result, they disagree with the case put forward by the OFT that the charges fall foul of the regulations governing unfair terms in consumer contracts.

The OFT wants the High Court to rule that under these regulations it has the authority to decide that the charges are unfair.

Mr Rabinowitz went on to deny that the banks' current terms and conditions - some of which have been rewritten in the last few months - were a cosmetic attempt to disguise the truth.

The OFT claims the position regarding charges was more accurately reflected in historic terms and conditions.

"There has been no attempt to change the core of the contract," he said.

Mr Rabinowitz finished his main submission by addressing the issue of whether the bank charges in question might be deemed to be unfair penalties.

"So long as they are payments for services, and are not payments for breach of contract, they cannot be penalties," he added.

Consequences

If the OFT argument is upheld, it could mean banks and building societies having to return billions of pounds collected from customers over the past six years.

The hearing had originally been scheduled to last for eight days.

But, as expected, Mr Justice Andrew Smith told the court he thought there was a strong likelihood of a "substantial overrun".

He also commented on the scale of material under consideration, describing the volume of evidence submitted as an "enormous burden".

An initial ruling is still expected around Easter.

However, whichever side loses is expected to appeal, possibly all the way to the House of Lords, meaning the issue may not be resolved until next year.

The outcome of the long-awaited court case could bring a fundamental change to the UK current account market.

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