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OFT
says default charges must reflect real loss
OFT
consults with eight credit card companies on the level of their
default charges
135/05
26 July 2005
The OFT has
written to eight major credit card companies to consult on its
provisional conclusion that the levels of default charges they impose
(e.g. for late payments) are excessive.
A charge
currently of around £20 to £25 is payable if a cardholder
fails to pay his credit card bill on the due date, exceeds his credit
limit, or pays on time but by a direct debit or cheque that is not honoured.
The OFT
believes that it is unfair for the purposes of contract terms
regulation to require a consumer who defaults in one of these ways to
pay a disproportionately high charge. The OFT considers that, in a
consumer contract, a default charge is likely to be
disproportionately high if it is more than a genuine pre-estimate of
the damages that the card issuer would win in court if it sued the
cardholder for breach of contract.
The law
restricts the damages that can be awarded to compensate for loss
suffered as a result of a breach of contract. The breach must be an
effective cause of the loss. The innocent party is entitled to be
compensated for certain types of loss that were reasonably
foreseeable at the time that the contract was made, but is not
entitled to more.
The OFT
believes that a default charge calculated in accordance with these
principles would be likely to be fair under the contract terms
regulations. The OFT's provisional view is that the levels of the
default charges imposed by the credit card companies need to be
reduced in order to be fair.
The credit
card companies have cooperated with the OFT's investigation into
default charges. They have stated that they consider their default
charge provisions are fair. The OFT has now explained to them why it
does not accept their view and has given them three months in which
to provide suitable undertakings or otherwise to address the concerns
it has raised. The OFT has powers to take enforcement action in the
courts if necessary to protect consumers.
Credit is one
of the OFT's five priority sectors.
NOTE
The Unfair
Terms in Consumer Contracts Regulations 1999 (UTCCRs) revoke and
replace the Unfair Terms in Consumer Contracts Regulations 1994
which came into force on 1 July 1995. The UTCCRs protect consumers
against unfair standard terms in contracts they make with traders.
This press
release can be found on the OFT's website at: http://www.oft.gov.uk/News/Press+releases/2005/135-05.htm
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