Amendment of the Unfair Terms in Consumer Contract Regulations 1999
(1) The Unfair Terms in Consumer Contract Regulations 1999 (S.I. 1999/2083) is amended as follows.
(2) After regulation 6(1), insert
(1A) Paragraph 2 shall not apply to contracts for the supply of financial services..
(3) After regulation 6(2) insert
In so far as it is in plain and intelligible language, the assessment of a term in a contract for financial services shall not relate
(a) to the definition of the main subject matter of the contract, or
(b) to the adequacy of the main price or remuneration, as against the goods or services supplied in exchange.
(4) Where a term of a contract provides for the charging of a consumer and the circumstances in which that charge can be imposed need not arise during the term of the contract, then such price or remuneration shall not fall within the main price or remuneration for the purposes of paragraph 3.
(5) If for the purposes of paragraph 3 there is doubt about what represents the main price or remuneration, the interpretation which is most favourable to the consumer shall prevail..(Mr. Breed.)
I beg to move, That the clause be read a Second time.
New clause 6 relates to a fairly topical issue, I suppose: bank charges. I do not know how many cases hon. Members have had of constituents being extremely unhappy with the bank charges that they have been subjected to. Of course, we were all enjoined to await the outcome of the Supreme Court case, and then, to utter disappointment and dismay, the banks won the day and many consumers and our constituents were extremely angry, if not disappointed.
The result of the Supreme Courts decision on bank charges has had a major effect on the publics opinion of banks and banking, just as bonuses did. The public feel that the taxpayer has bailed out the banks, while the banks have been allowed to charge unfair rates for the work that they have done. In fact, the OFT estimated that in 2006 the UK banks took £2.6 billion from their customers in unauthorised overdraft charges. Many people believe that, in many cases, those charges were disproportionate to the work involved in dealing with sometimes rather modest overdrafts. What is certain is that there has been a consumer backlash, with hundreds of thousands of people reclaiming the money that they were charged. We all know that there was a large number of cases, which, I suspect, put a particular strain on the Financial Ombudsman Service, and indeed the county courts.
I agree strongly, again, with the direction that the hon. Gentleman is coming from. May I raise a similar point about whether consumers know and are clear about the costs that might be incurred in taking certain actions? Do they even know, for example, what the real cost is of running a current accountof so-called free banking, which is a myth? The real cost is the gap between the amount that they are charged and the prevailing base rate, which is what the banks get. If consumers could be informed of that information in some waythere have been proposals of that typecould we not move to a position where transparency can do most of the heavy lifting?
People would be able to compete on the basis of accurate information about the relative merits of each account. Is that not exactly what happened in the insurance industry? We have now moved over to search engines that can give us detailed information about what we will really be charged for car or home insurance, for example. Is that not where we need to be with banks?
I think that that is right. Transparency is a great help. As many know, I come from a banking background. Bank charges back in the 1960s and 1970s were anything but transparent. We used to decide what figure would be appropriate and charge it, and if anybody complained, we came to an agreement with them, which was not exactly good either.
Today, charges can be laid down in great reams of terms and conditions, but that is no more transparent than anything else. Seemingly every quarter or every other quarter, I get a new little booklet with new terms and conditions written in legalese. I just accept it and hope that, having banked with the same bank for nearly 50 years, I will not get done, but many people have fallen foul of the terms and conditions and been charged huge amounts of money for transgressing limits without realising that doing so would have such an effect.
As we know, the banks and the OFT agreed to a test case in the High Court to determine whether the OFT had the power to decide whether the banks terms and conditions were unfair. We were all happy to wait for the judgment, although it seemed to take an inordinately long time, because it was felt that that was ultimately the best way forward. Perhaps it would not have been the same if our provisions on collective proceedings had been passed.
The OFT has the power to assess the fairness of the terms in consumer contracts, subject to limits laid down in the Unfair Terms in Consumer Contracts Regulations 1999, statutory instrument 2083, which implemented European Council directive 93/13/EEC. Regulation 6(2) states that
the assessment of fairness of a term shall not relate...to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.
In other words, the value for money equation is excluded. The Court of Appeal held that the exclusion applied only to the core price terms of the contract, not to ancillary terms such as charges for unauthorised overdrafts and other bits and pieces. That would have allowed the OFT to assess the banks terms and conditions and decide what constitutes a fair charge for entering into an unauthorised overdraft. Many of us were not terribly surprised to hear that it might cost the bank an estimated £2 or £3 to administer an unauthorised overdraft, but some banks were charging £30 for the transgression.
I must say that I am uneasy about the amendment, as it is widely drawn, but on that point, the figure of £3 compared to £30 is already covered in the law of our country. A contract can include a penalty that is not enforceable at law or a genuine pre-estimate of loss, to use the technical term, which is enforceable at law. If the banks are charging £30 for something that costs about £3, the courts would determine that to be a penalty and not enforceable. That has been the law for 100 years in this country.
That is precisely the problem. The OFT case was brought under the unfair contract terms regulations; I am talking about something completely different: a basic element of contract law in England and Wales that was not ventilated at all in that court case. The court case was based on the wrong issue.
That may well be the case, but that does not exclude the opportunity to change the current unfair terms of trade. We could then have a belt and braces operation, which may be a way of mitigating what many consumers feel completely sore about, perhaps including many of the hon. Gentlemans constituents. I do not know the situation in his constituency, but I had more than 50 constituents waiting with bated breath to see what was going to happen.
However, we all know that the banks appealed the High Court decision and that the Supreme Court disagreed with the Court of Appeals ruling, holding that the charges for unauthorised overdrafts fell within the exclusion. In the Supreme Court judgment, Lord Walker commented that
Ministers and Parliament had decided 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 and that Parliament might wish to consider whether to revisit that decision.
We certainly could consider whether we want to revisit that decision.
Whether or not new clause 6 is the most appropriate way to address the situation, it is certainly one way to address it or to put it back to what the High Court understood it to be, as opposed to what the Supreme Court ultimately ruled it was.
I understandperhaps the Minister can confirm thisthat the normal route to achieve that change would be via the Department for Business, Innovation and Skills reissuing the unfair terms of contract regulations, which would perhaps clarify the situation. However, I understand that that is unlikely at present, as the European Union is considering a new consumer rights directive that may, in due course, amend those regulations. Nevertheless, we are concerned that no action will be taken in the UK until that happens, and there is no certainty that a new consumer rights directive will come into force, even within the next five years. Even if it does come into force, it may require amending.
I acknowledge the assistance I have received with new clause 6 from the Consumers Association, to which I gratefully pay tribute. It was extremely closely involved in the bank charges case, of course. It has also assisted in the drafting of new clause 6, which seeks to make changes to put the situation back to what it was, as the High Court wanted but the Supreme Court did not.
Of course, the great problem is that new clause 6 will not be retrospective, and I would not suggest that it should be. Nevertheless, there is a requirement on this Houseperhaps especially at this timeat least to address the situation with bank charges, which has caused so much concern, hardship, anger and frustration to so many people, and not just because of their own personal circumstances. Many people have incurred very significant bank charges, which they have found difficult to repay. Also, the situation with bank charges has contributed to the whole psyche of the British public concerning how they see the British banking system, which is a great shame. The bankers have brought some criticism on themselves because of the bonuses and the debacle of our having to bail them out. However, I thought there might have been some recognition that, even if all the money could not be paid back, we could still find a more reasonable, equitable, sensible and transparent way of dealing with bank charges.
The bank charges case has been deeply damaging to our banking industry as a whole. I do not know whether the banks themselves recognise that; perhaps they do not really care. However, it will cause lasting damage. The relationship between an individual and their bank may not be the same as that between a patient and a doctor, but there are some similarities, in the sense that people need that trust, that recognition and that hoped-for reasonable response from the other party.
For many people, the banks use of the appeal system through the Supreme Courtwhereby they avoided paying back charges that, by any measure, were extortionate in many cases and totally disproportionate in a great many othersplaced shame on the banks and our banking system. Even if new clause 6 is not accepted, it at least attempts to put back into the public arena the fact that Parliament is prepared to revisit and deal with this issue, as we have been encouraged to do, and to treat it seriously, so that we get fairness and transparency and restore some of the good name that banks in general used to have not so very long ago.
I certainly echo the hon. Gentlemans comment about the damage done to our banking industry by this particular difficulty, but I understand that the banks are on record as suggesting that a change of the kind outlined in the new clause could mean the end of free bankingalthough it is not entirely freeas they introduce costs in other ways. Is he concerned that reducing the penalty or administrative charge for overdrafts would simply cause those costs to emerge in some other part of the banking industry?
That has always been a danger. As the hon. Gentleman knows, I have said in the Treasury Committee that we should beware of getting what we ask for. We should recognise in creating such measures that the banks will recoup the revenue that they think they require in other ways.
At present, the system lacks complete transparency, as the hon. Member for Chichester said. So-called free banking is not transparent, in the sense that others pay the cost. Some charges peripheral to the basic terms and conditions are wholly inappropriate, and we need a whole new regime. Perhaps other aspects coming down the track will make the banks think again; that could be a danger. However, I believe that competition, if we ensure that it exists, will sort some of that out.
Until now, the banks have been able to get away with what has not been their finest hour. A recognition of what has gone on in the past, what consumers feel and the degree of transparency necessary should make them respond. However, in case they do not, the new clause is an opportunity to assure the public that Parliament takes the matter seriously.
The new clause is very clever, but it is extremely sweeping and would extend to contingent charges across the whole financial services sector. It goes well beyond bank lending, which the hon. Gentleman discussed, to include savings and investments, insurance, debit and credit cards, pensions, payment services and other consumer financial services.
The Government understand the concerns of consumers affected by the Supreme Court judgment, and I appreciate how the hon. Gentleman has raised the new clause, but as he will be aware, we have announced that we will work with the Office of Fair Trading, consumer groups and the banks to agree a fairer, simpler and more transparent system of bank charges in future. We have not ruled out further measures if a voluntary approach does not produce results.
I would expect that if no voluntary approach is successfully implemented, a Government would want to take action. However, a voluntary solution has the advantage that it can quickly adapt to changes in the market. Any regulatory solution will need to be carefully thought through. We must maintain price competition and avoid unintended consequences from firms deciding to compensate for any revenue reduction by developing new forms of charge.
The hon. Gentleman mentioned the Unfair Terms in Consumer Contracts Regulations 1999 as a vehicle for any necessary amendments if we chose to go down the legislative route. I am advised that as it would be a major step, any such amendment would be likely to require primary legislation. That is something to be considered. However, we strongly take the view that a voluntary approach is likely to be more speedy, and we hope that it will have the impact that we want, so that consumers get a fair deal.
The hon. Gentleman also spoke of proposed changes under the consumer rights directive. That may be a suitable vehicle for future reforms, but that will depend on the progress with that directive. He will be aware that it has been under discussion in Europe for some time.
On the wider point, with regard to what the new clause proposes for all financial sectors, I am not convinced that a case has been made. We should not lightly intervene in commercial decision making in a competitive market. It has been the long-standing policy of successive Governments that we should rely on competition to make markets fair. It is a fundamental tenet of this Governments thinking that we should intervene only if there is a demonstrable market failure that cannot be fixed by other means.
The new clause would have far-reaching and possibly unintended consequences. As well as carefully considering all the options, we would want to ensure that a full consultation with interested stakeholders took place before we considered the introduction of price regulation. In effect, the hon. Gentleman is asking the Government to get involved with price regulation across the financial services sector in the area in question. We want to take action in response to the Supreme Court case, but we seek to do it on a voluntary basis. We have not ruled out taking legislative action, but we should not have such a wide-ranging power, as it could have unintended consequences that have not been considered. With those assurances, I hope that the hon. Gentleman will seek leave to withdraw the new clause.
I thank the Minister for those remarks. I entirely agree that a voluntary arrangement would be swifter and more satisfactory. However, consider what has gone on in respect of the appeal, and what has happened since. I have heard nothing from the banks, individually or collectively, to indicate that they have any intention of voluntarily giving up billions of pounds of revenue. I suspect that Parliament would need to make it clear that unless satisfactory arrangements were reached voluntarily, we would certainly legislate. That might give them a nudge in the right direction.
I entirely agree about competition. It is patently obvious from constituents letters that remarkably similar chargesall of them hugely disproportionate to the underlying costhave been applied by different banks for the same sorts of facilities. To say that that was an absolutely competitive situation is misleading; it clearly was not. The banks were charging what they could get away with, because the customer did not have the opportunity of going to another bank with a lesser charge, and anyway, they would have had all the inconvenience of changing banks. Whether it was HSBC, NatWest, Lloyds or the Royal Bank of Scotland, the underlying charges for unauthorised overdrafts bore a remarkable similarity. The greatest similarity, however, is that they were hugely disproportionate to the underlying cost.
The Minister said that the new clause is widely drawn and covers all sorts. Frankly, I do not think that anyone should get away with unfair charges. I do not care whether a company is an insurance company, a credit card company or any other company in the financial sector; their charges should be fair and transparent. I have no problem with the new clause being wide-ranging. It is to do with unfair charges, and I do not want to see unfair charges anywhere. However, I accept the point about consultation. If the Government are seizing the initiative on the subject by taking the matter to the banks and seeking voluntary arrangements, perhaps that, together with the threat of appropriate legislation if the banks do not come forward with something sensible and transparent, is the way forward.
I am happy at this stage to seek leave to withdraw the new clause. I want to reflect on what the Minister has said about dealing with the issue, and I reserve the right to come back to it at a later stage. However, at this time, I beg to ask leave to withdraw the new clause.