Proportionate consumer contract charges


Over the last decade a new industry has taken root across the UK: excessive charging for missing bill payments or having insufficient funds in a bank account.  Additional charging is now a regular feature of almost all consumer contracts in the UK.  But charging operates soley for the benefit of the corporate or business party in this one-way contractual street.  For example:

  • a homeowner misses her monthly mortgage and is charged a £60 'arrears fee' each month while in arrears.  As at January 2009 some 500,000 people across the UK were in mortgage arrears generating a potential £30m in extra profits from charges each month for lenders;

  • a worker's wages drop due to illness and he is unable to pay four direct debits that week - his bank imposes 'bank charges' of £184. Chances are the companies who haven't been paid will impose 'failed direct debit' charges of £25, resulting in overall charges of almost 4 times the value of the worker's weekly statutory sick pay. Such charges enables UK banks to generate an additional £3 to £4bn each year; or

  • a homeowner is a week late in paying a property managers bill of £20 and receives a 'polite reminder' letter which adds £17.62 to their account as a 'administration charge'. 

What do all of these charges have in common?  Their cost is wholly unrelated to the action or inaction on the part of the citizen.  Charges are disproportionate in cost. 

The culture of charging in consumer contracts has become an insidious and unethical business: the financial sector and other businesses are exploiting customers at their weakest moment.  Charges are generally imposed when the citizen is down on his or her luck - ill, going through a relationship breakdown or other life crisis.  Moreover, they lead or contribute to a cycle of debt, poverty and homelessness.

From a legal perspective, the common law in Scotland and England has always presupposed that a contract is entered into freely by parties who have free choice to reach consensus on the terms of the contract.  However, the Unfair Terms in Consumer Contract Regulations (UTCCR) were orginally introduced in the UK in 1995 to reflect the reality that there was seldom any equality of arms in contracts between a consumer and a business.  Most businesses employ standard 'take it or leave it' terms and conditions of contract. 

Govan Law Centre (GLC) believes there is now an urgent need for law reform to tackle excessive charging in consumer contracts.  Existing protection is reactive and requires the customer to opt-in and traverse all of the difficulties associated with accessing civil justice.   The fact that the OFT's test case challenging the fairness of UK bank charges has been running for 18 months without any resolution - and looks likely to run for a lot longer still - confirms the weakness in the present system.

There is a cogent case for amending the current statutory protection in consumer contracts to require the imposition of any additional charge or fee to be proportionate to the cost of the missed payment, default or overdrawn sum as a matter of fairness.   GLC has been working with Mohammad Sarwar MP to draft an appropriate legislative provision - now set out in an Excessive Charges Bill 2009 (PDF) - in order to assist the debate for progressive change.

We have suggested that no additional charge or fee in a consumer contract should exceed 2.5% of the value of the contractual default or failure or attempt to exceed an agreed overdraft.  For example, a missed or paid overdrawn direct debit of £100 would not incur a charge in excess of £2.50  Returning to our example of four bounced direct debits incurring charges of £184, if the total value of these debits was worth £400 the maximum overall charge would reduced to £10.  Whereas unpaid companies would typically impose £25 unpaid direct debit charges - resulting in an additional £100 of charges - the maximum that could levied overall would again be £10.

We believe this proposal to be both fair and proportionate, having regard to the fact that in the 21st century the financial services sector and other businesses have efficient computerised credit control systems whereby standard letters, e-mails or automated telephone calls will typically cost around £1 or less to produce and despatch.

There is no doubt, in GLC's experience, that present arrangements are resulting in ordinary people and families across the UK being financially exploited and exposed to needless financial hardship, poverty and homelessness.






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