Consumer wins case over excessive bank charges - 14th October  2005

A law student has taken national bank, Abbey to court over "excessive" charges on his current account and won. Consumer groups and banking watchdogs have welcomed this victory, which could open the floodgates for similar claims from disgruntled customers and could ultimately lead to cheaper banking fees for everyone.

The student entered a claim at Plymouth County Court against Abbey National bank, after being charged £64 for bouncing a direct debit twice in one month, on the grounds that the penalty was "disproportionate" to the costs incurred by the bank. 

Abbey failed to submit a defence to the claim and said that they have no record of having received the claim and therefore did not have the opportunity to defend themselves. This failure lead to a default judgement and the resulting court order stated that "the defendant must pay the claimant an amount which the court will decide and costs". 

The issue of bank charges has been brought to the fore in recent months after it was reported that banks were making over £3 billion each year from such charges. 

The relationship between a bank and its customers is a contractual one and, as a matter of law, one party can only recover "liquidated" damages, that is an amount that reflects the real loss caused by the other party's breach of contract. Charges for bounced payments and late payments on credit facilities can typically be between £20 and £30. 

Consumer groups argue that these sums are disproportionate to the loss suffered by the financial institutions, who typically send only one computer-generated letter to advise the customer of the breach and resultant charges. Such charges would therefore seem to be a "penalty" imposed because of the breach, which are not allowed in Common Law. 

Excessive charges can also be in breach of the Unfair Terms of the Consumer Contracts Regulations 1999, which state that a consumer should not pay a disproportionately high amount of compensation if he or she fails to meet an obligation. 

The Office of Fair Trading has recently considered this issue in respect of credit card company default charges and has taken the provisional view that the level of charges imposed need to be reduced to be "fair" in accordance with regulations. The credit card company concerned will now be given time to address the issue but if the OFT does not think enough has been done, it is empowered to bring Court action, if necessary, to protect the consumer.

Elizabeth Fry, Head of the Disputes team at local solicitors, Wards, says: “Although the case was won on a technicality, it is good news for the consumer. This case, together with increased pressure from consumer groups and the recent intervention of the OFT into credit company charging practices, means that it is likely that banks will need to bow to calls to review their charging practices.”