When you read this section it may surprise you that the cases go back for over 100 years. These cases although not all in relation to banks per say outline that charging consumers penalties for failing to meet there obligations is not allowed under law. This being the case in case law even before the enactment of legislation which expressly forbids this.
When thought about logically it is technically theft/deception, which requires dishonest taking of property (including money) belonging to another with the intention to permanently deprive. If a person was found guilty of this in criminal law they would face jail, yet under civil law which controls penalty charges, banks and other businesses have been told their charges are contrary to the law yet they are not even stopped let alone punished.
Below is a summary/extract of he courts rulings in some cases that relate to penalty charges:
Dunlop Pneumatic Tyre Co. Ltd. Vs New Garage and Motor Co. Ltd. (1915)
Lord Dunedin set out some tests that are considered even in modern cases when the court is asked to rule on penalty charges. They are; 1) If it is "extravagant and unconscionable" i.e. that the cost incurred by the business because of the breach is lower than what the consumer is being expected to pay because of the breach. 2) It is also a penalty where the consumer is to pay a larger sum due to failure to pay a smaller sum. Ford Motor Co. v. Armstrong (1915)
Lordsvale Finance PLC Vs Bank of Zambia (1996) QB 752
"whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for the breach. That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if the breach occurred"
Bridge Vs Campbell Discount Co. Ltd (1962)
The court held that the term that specified charges in the case of cancellation of a hire purchase agreement was a penalty charge and therefore it was unenforceable. Therefore where there is a term in a contract that is a penalty it can not be enforceable.
Murray Vs Leisureplay (2005) EWCA Civ 963
English contract law recognises that, if the parties agree that a party in breach of contract shall pay an unjustifiable amount in the event of a breach of contract, their agreement is to that extent unenforceable.
In conclusion, the above cases show that extortionate penalties imposed against consumers for failing to meet obligations are unfair and contrary to the law, yet unless each case is taken individually not a lot is being done to protect consumers despite the laws ruling on the issue.
What the Unfair Terms in Consumer Contracts Regulations 1999 No 2083 states:
Schedule 2 Indicative and Non-Exhaustive List of Terms which may be Regarded as Unfair
(e) requiring any consumer who fails to fulfil his obligation to pay a dis-proportionately high sum in compensation 10 Complaints- consideration by (OFT)
(1) It shall be the duty of the [OFT] to consider any complaint made to [it] that any contract term drawn up for general use is unfair, unless--
(a) the complaint appears to the [OFT] to be frivolous or vexatious; or
(b) a qualifying body has notified the [OFT] that it agrees to consider the complaint.
(2) The [OFT] shall give reasons for [its] decision to apply or not to apply, as the case may be, for an injunction under regulation 12 in relation to any complaint which these Regulations require [it] to consider.
12 Injunctions to prevent continued use of unfair terms
1) The [OFT] or, subject to paragraph (2), any qualifying body may apply for an injunction (including an interim injunction) against any person appearing to the [OFT] or that body to be using, or recommending use of, an unfair term drawn up for general use in contracts concluded with consumers
As can be seen, the OFT has a duty to act. In addition they have the ability to apply for an Injunction to stop these penalty charges, however, thus far they have failed to do so.