Law student wins big penalty charges case

A law student has won a groundbreaking victory over the penalty charges levied by banks when customers go overdrawn or are late with payments.

Stephen Hone, 29, from Plymouth, took Abbey to court claiming that the bank's £32 penalty charge for bouncing a direct debit was unfair, as it was disproportionate to the costs incurred by the bank.

Mr Hone, a father of three, is now expected to be awarded hundreds of pounds in compensation. In his claim entered at Plymouth County Court in Devon, Mr Hone said he had been charged a total of £2,000 over six years.

He wrote: "Your charges do not reflect any actual or real loss, instead they appear to represent a lucrative profit-making scheme."

He added that the £32 charge was simply a "moneyspinner" for the bank, whose only cost was in generating an automatic letter.

Abbey failed to file a defence because it says it was not notified of the court date. So the district judge, Andrew Moon, had no option but to find in Mr Hone's favour. He made a court order requiring Abbey to pay Mr Hone compensation plus costs, with the exact figure to be decided at a later date.

So, does this ruling mean that customers of banks no longer have to pay these punitive penalties? The picture is, at best, fuzzy.

Abbey immediately issued a statement saying: "This ruling does not set a precedent. We are applying to the court to have the judgment set aside. The charges we impose are legitimate and proportionate to the administrative costs incurred by the bank for situations such as direct debits."

Jobs & Money was the first paper to highlight the potential illegality of penalty charges imposed by the banks. Richard Colbey, a barrister who writes regularly for Jobs & Money, told readers in August last year that late payment penalties may be legally unenforceable. He said: "Such charges are unlikely to be enforced by the courts: penalty clauses are legally void unless they reflect the loss the party enforcing them has suffered."

A lively correspondence followed in the letters pages of Jobs & Money, with stories of banks that backed down, and others that resisted.

So what does Mr Colbey say now? Here is his latest opinion:

"Claims against the Yorkshire Bank and the Alliance & Leicester have resulted in complete capitulation by the banks, while the NatWest and Lloyds TSB have been more robust in defending their position.

"The gist of what we said was that, as the charges are intended to penalise customers who overdraw in breach of contract, they are penalty clauses. Such clauses, under a century-old doctrine, are void even if written into a contract.

"This argument was validated by, perhaps somewhat naive, bank press officers stating the charges are designed as a way to deter or penalise unauthorised borrowing.

"The penalty clause argument, however, depends on the customer breaching the contract. Some banks frame charging clauses so that an 'unauthorised' overdraft may be permitted by the bank at a specified price. As the customer has effectively requested the facility and the bank agreed to it, there is no breach and hence no penalty charge.

"There would, however, potentially be a penalty clause if the bank had to pay the money which led to the unauthorised borrowing, for instance because a cheque guarantee card had been used or if the bank refused the payment.

"Mr Hone argued his case both on the basis of penalty clauses and the Unfair Terms in Consumer Contracts Regulations. These Regulations apply where a consumer, who fails to fulfil an obligation, is required to pay disproportionately high compensation.

"The £2,000 Mr Hone had to pay over six years seems disproportionate to the standard letters the Abbey had sent, and as the charges were mainly for refusing direct debits he was in breach. It may be that the courts will interpret the Regulations more widely than the penalty clause doctrine.

"Although it is always easier to win a case when the other side is not there, the judge still considered the merits of both sides' cases before deciding for Mr Hone. He even adjourned the hearing to give the Abbey an opportunity to be heard on how much it has to repay.

"Customers who want to reclaim such sums through a small claim in the county court should rely on both the Regulations and the penalty clause argument.

"Sometimes, though, the most effective way to counter disputed charges is to refuse to pay them. While banks may feel honour bound to defend legal proceedings brought against them, they rarely sue for disputed sums.

"Customers can close accounts leaving the charges outstanding and tell the bank's legal department it will be sued for libel if it reports them to credit reference agencies. That should be enough to have the charges written off as 'a goodwill gesture'."