Banks make substantial amounts of money from charging customers for becoming, or attempting to become, overdrawn on their current accounts without prior authorisation. The Office of Fair Trading (“OFT”), concerned that such charges may be unfair, agreed with the leading banks that it should be determined by the courts whether standard terms imposing these insufficient funds charges fall within the scope of, which provides an exception to the assessment of fairness Regulation 6 of the Unfair Terms in Consumer Contract Regulations 1999. Andrew Smith J. ([2008] EWHC 975 (Comm), [2008] 2 All E.R. (Comm) 625; noted [2008] C.L.J. 466) and the Court of Appeal ([2009] EWCA Civ 116, [2009] 2 W.L.R. 1286) found that they did not. The Supreme Court, unanimously, disagreed: Office of Fair Trading v. Abbey National plc. and others [2009] UKSC 6, [2009] 3 W.L.R. 1215.

Regulation 6(2) states that:

The Supreme Court focused upon Regulation 6(2)(b). It emphasised that this provision was unaffected by Regulation 6(2)(a) and was expressed in plain terms. Contrary to the decisions of the lower courts, the Justices concluded that if a term concerned only a part of the price or remuneration, it should still fall within the scope of Regulation 6(2)(b). Since the charges were a part of the price the bank received in exchange for providing customers with a current account, the relevant terms could not be assessed for fairness because of Regulation 6(2)(b).

This approach represents a more literal approach to the interpretation of the Regulations than is perhaps desirable. The Regulations implement European Council Directive 93/13/EEC; the trial judge and Court of Appeal both emphasised that the purpose of the Directive, and thus the Regulations, was to ensure adequate consumer protection. A pertinent principle, not expressly articulated by any of the judges but latent in the judgments of the lower courts, is that of “unfair surprise”: if a reasonable consumer would be surprised by any term, then the assessment of the fairness of that term should not be excluded by Regulation 6. A reasonable consumer may well be flabbergasted to be charged £40 for being overdrawn by £1 for only a day; the vast majority of customers do not consider insufficient funds charges to be an essential element of the contract they enter into with the bank. Sheltering such terms from a test of fairness does little to further the goal of consumer protection.

In Director General of Fair Trading v. First National Bank plc. [2001] UKHL 52, [2002] 1 A.C. 481 the House of Lords emphasised that Regulation 6 should be interpreted restrictively, and held that there is a difference between “ancillary” and “core” terms: terms “ancillary” to the “core” of the bargain should still be subject to assessment for fairness. However, in Abbey National the Supreme Court thought that such language was simply not helpful: the only question for the court when applying Regulation 6(2)(b) is whether the term in question relates to any part of the contractual consideration. This has the advantage of absolving the courts from difficult questions regarding what is merely “ancillary”, but greatly expands the scope of Regulation 6, thereby reducing the amount of protection given to consumers.

The Supreme Court was content to allow a less restrictive interpretation of Regulation 6 since it identified the purpose of the Regulations not to be consumer protection but rather consumer choice. This is a significant difference from the decisions below. There is no guidance from the European Court of Justice (“ECJ”) on how Regulation 6 should be interpreted, but the Supreme Court nevertheless considered the matter to be acte clair and that there was no need to refer the issue to the ECJ. This is a dubious conclusion; after all, four experienced judges disagreed with the Supreme Court's interpretation. The Justices appear to have been influenced by the fact that both the OFT and the banks wanted to avoid any extra delay in the case. This is understandable. Less convincing is the explanation that, even if the correct interpretation of Regulation 6 is that favoured by the Court of Appeal (namely, whether or not the relevant terms were ancillary to the main bargain), then it wrongly applied the test to the facts: since the application of the Regulations is a matter of domestic law, there was no need to seek the ECJ's guidance. This might be thought to be an unsatisfactory fudge; the correct interpretation of the Regulations should be clearly understood.

Lord Phillips suggested that the OFT may still challenge the fairness of the relevant terms under the Regulations. This would be tremendously difficult, since the assessment of fairness could not relate to the services the banks provide in exchange (because of Regulation 6). Given the limited chances of such a challenge succeeding, the OFT has now stated that it will not pursue its investigation further (OFT 1154, Personal Current Accounts – Unarranged Overdraft Charges: Decision on an investigation under the UTCCRs and next steps (December 2009)). It seems that the OFT may now favour legislative intervention. In a similar vein, it may not be reading too much into the Supreme Court's decision to suggest that the Justices thought that insufficient funds charges should really be dealt with by Parliament rather than the judiciary, if indeed the charges are unfair. Lord Walker noted that it is open to the legislature to afford greater rights to consumers, and that other European countries, notably Germany, have chosen to do this.

It is to be hoped that the decision in Abbey National will prompt legislative intervention. The law regarding unfair terms in English law generally is something of a mess and can be difficult for consumers to understand; for example, the co-existence of the Regulations and the Unfair Contract Terms Act 1977 is unnecessarily complicated. A helpful first step would be to adopt the Law Commission's Report, Unfair Terms in Contracts (Law Com. No. 292 (2005)). The Law Commission thought that a term regarding price should only be excluded from assessment for fairness if the price is transparent, payable in circumstances substantially the same as the consumer expected, and calculated in a way substantially the same as the way the consumer reasonably expected (clause 4(3)). Although the Law Commission did not think its proposals would alter the substance of the law, it is significant that terms imposing insufficient funds charges probably would have been subject to assessment for fairness under its scheme.