Egg claims its charges are NOT unlawful

[Mistermind]

Egg - Annual report and accounts 2004

Egg PLC Annual Report for 2004 including the following P&L breakdown for years 2004 compared to previous year 2003:

Net interest income

287.5

263.2

Other operating income

209.2

156.4

Egg UK operating profit

73.6

72.8

In year 2004 interest income totalled £287 million, but "other operating income" (euphemism for punitive charges?) amounted to £209 million -- Egg charges only just covered their operating costs?

Egg sent me the following (italics below are mine):

"..... Egg therefore puts in place systems and processes to deal with the same. The Charges set out in condition 7 of the Agreement are calculated by taking into account the aggregate costs incurred by Egg in maintaining those systems and processes and the estimated number of customers who will exceed the Credit Limits on their accounts and/or fail to make and/or be late in paying their required repayments. The amount of the Charges applied under Condition 7, therefore, represents a genuine pre-estimate of the loss caused to Egg by customers being late in and/or failing to make the agreed repayments and/ or exceeding their Credit Limits."

Egg, how many years have you been in this stabilised business? Ten years? Twelve? Do you really need "estimated number" when you have the real reliable numbers? How many charges did you levy last year? What was the total amount raked in? What were your IT and clerical cost breakdowns? You know these figures, will you tell the County Court? To prepare our case we need disclosure of these figures. Will you be appearing in court on the day?

If you did show to the OFT's CEO figures suggesting that Egg Card will go involvent unless cardholders paid £16 a time, then perhaps it's time your owners the Prudential, and investment bank analysts and financial journalists take a look at your situation.

[ninekey]

I think it's sensible for us to start trying to counter this defence from Egg. They are the only institution, as far as I know, to present some kind of 'science' behind their formulation of the charges.

To my mind, we need to be attacking the global nature of this formulation. Why is it appropriate to look at the pattern of all Egg's customers when making the pre-estimate. On the legal authorities, it should only be the actual cost of the individual Claimant-customer's breach that matters.

My fear is that a District Judge on the small claims track might well be persuaded that there is some merit to this defence, superficially.

By reference to decided cases, is there anything we can say about the validity of global pre-estimating?

[Mistermind]

If Egg says that, alone of all the institutions, unless they are allowed to rip £16 off a cardholder both in the future and retrospectively for 6 years in the past they cannot make ends meet and pay their way, then there is something unique about Egg PLC's financial wellbeing. Legitimate questions will arise about their longterm commercial viability while continuing to service 2 million cardholders.

Investment bank analysts and national daily journalists please take note. If Egg is this hard up, then the transparency of Egg PLC's balance sheet, not to mention a public audit, become matters of public concern.

[Glenn UK]

I think the primary argument against this is that the charges ibased on an estimate of how much to costs to cover the losses incureed by the defaulting customers, so the cost is applied equally to all.

So if you only default once then proportionally you are charged the same as somoene who defaults numerous times irrespective to the actual cost of the work involved.

So if you defualt once or twice a year the actual cost of delaing with your claim is in fact minimla in the same way that other peoples charges are, iei its all utaomtaic and involves no cost or effort.

However, if somoen stops paying completely the cost involved could be radically more.

Finally its a penalty charge which is illegal, a consumer cannot be made to indemnify a 3rd party because of defaulitng on a clause in a contract.

I think that lots right.

So whichever way you look at it the charges are a)unfair b)unlawful and c)uneforceable.

They are defeninding the walls of their sandcastle against the oncoming tide in my opinion.

Glenn

[ninekey]

Glenn, I like your thinking on this. It cannot be reasonable to quantify charging levels for Customer A's breach by reference to what Customers B to Z are expected to do.

We could do with some case law to support this. I'll have a hunt.

I hear what you say about the penalty nature of the clause. However, if Egg can show that the pre-estimate was genuine and reasonable and consistent in some way with actual cost incurred, then it will not be a penalty in law and will be enforceable.

[Glenn UK]

Originally Posted by ninekey

I hear what you say about the penalty nature of the clause. However, if Egg can show that the pre-estimate was genuine and reasonable and consistent in some way with actual cost incurred, then it will not be a penalty in law and will be enforceable.

Im not sure this is true, the unlawfulness of a penalty is in the fact it is a penalty not the scale of it.

The logic is that you cannot be made to indemnify a third party due to you breach of a contract.

I think youll find its actually nothing to do with how much it is, even if it reflects the banks costs, its their tough luck becuase you're a consumer and their the business.

Im no expert but this is my reading of the whole situatrion.

HTH

glenn

[Mistermind]

http://www.oft.gov.uk/News/Press+releases/2006/68-06.htm

The scope and details of the much reported OFT pronouncement on 5th April 2006 -- from the horse's mouth, including the special £16 maximum which Egg Card somehow wrangled for itself.

I gather Egg is due for court appearance in mid-September vs Yasmin, on the same day Egg Card both to defend a claim against it and to press a counterclaim for total account balance -- Egg threatening CCJ and legal costs awarded against the loser.

But, at the last minute will Egg show up in court? The forum joint-founder thinks not:

Sticky: Has Egg counterclaimed against you? Don't worry by BankFodder

The entire forum will be waiting with bated breath.

[Glenn UK]

Is this at small claims or fast track?

Either way it will be a milestone for both sides of the argument because both will take what they can from it.

Glenn

[ninekey]

Originally Posted by Glenn UK

I think youll find its actually nothing to do with how much it is, even if it reflects the banks costs, its their tough luck becuase you're a consumer and their the business.

Hmmm, I don't think that the business / consumer relationship precludes their entitlement, in principle, to damages for breach of contract. A charge of, say, 50p would not be a penalty if it equates to the Bank's actual costs consequent upon the consumer's breach.

[Glenn UK]

I think that the point is whether its a penaly or not.

If the charge is punitive in nature, ie there is no loss then its a penalty.

IF the only cost is for the automatic generation of letters then there is no loss, therefore its a penalty whatever the cost.

I think it may depend on whether there is actually a loss, arguably since a bank or cc company charges you interest for the cost of borrowing their money, authorised or not, then there is no loss from allowing you to use their money because you pay for the privelige.

When they apply a charge for sending you a letter the cost is self-imposed and cannot in my view be considered as a 'loss'. Its administration of your account the cost of whihc should come from the interest charged.

JMHO

GLenn

[Mistermind]

When a railway ticket collector finds a passenger without a ticket, the latter is fined £20 on the spot. The railway company does not really want to collect £20 to boost its income stream, it would far prefer all passengers to buy a ticket before travelling. If a person with the same name and address is caught more than once or twice, I believe the standard procedure is to prosecute in court.

In this case the charge is truly punitive, but acceptable in law. It is a fine used as disincentive, to make a prominent example of one to discourage all the rest.

Credit cards and banks on the other hand, do not want hard-up customers to stop paying late or going over credit limit or bounce chequest or D/Ds. "By all means carry on incurring charges, the more often the merrier" they say as they lick the lips. For them it is the goose that lays golden eggs, their superstar revenue stream, probably earning more than their income from monthly interest. In this case "punitive charge" would not be the best description -- "extortionate charge" would be truer.

[gizmo111]

Originally Posted by Mistermind

When a railway ticket collector finds a passenger without a ticket, the latter is fined £20 on the spot. The railway company does not really want to collect £20 to boost its income stream, it would far prefer all passengers to buy a ticket before travelling. If a person with the same name and address is caught more than once or twice, I believe the standard procedure is to prosecute in court.

In this case the charge is truly punitive, but acceptable in law. It is a fine used as disincentive, to make a prominent example of one to discourage all the rest.

Credit cards and banks on the other hand, do not want hard-up customers to stop paying late or going over credit limit or bounce chequest or D/Ds. "By all means carry on incurring charges, the more often the merrier" they say as they lick the lips. For them it is the goose that lays golden eggs, their superstar revenue stream, probably earning more than their income from monthly interest. In this case "punitive charge" would not be the best description -- "extortionate charge" would be truer.

But in the railway case sceniario the ticket collector manually checks and fines non paying passenger for no ticket so there has been loss to company in manual intervention and genuine pre estimate and fine is justified - and you have a time to pay the penalty it is not taken out of your monthly living expenses before you have a chance to defend

[Mistermind]

The railway uses disproportionate fines (£20 fine for not having bought even an 80 pence ticket) as a deterrent with shock value -- do this again and there will be a criminal court summons.

Credit cards and banks automate disproportionate charges like cyber gangsters collecting protection money -- "So wonderful that you paid in late or went over your credit limit or bounced a £5 D/D. Do keep it up, and see you same place same time next month!"

[Spiceskull]

There is an alternative argument for the pre-estimate of losses. The penalty is calculated based on what the bank expects the average person to cost them over, say, a twelve month period, and factored through year on year. These costs typically include setting up the technology to flag accounts, send letters and the like.

Let us assume that not a single customer defaults on any payment, and therefore no penalty charges are required. These capital costs have still been accounted for, the systems are still in place, and they still need to be paid for...

The argument of Egg, and indeed all banks, that these systems are there to deal with 'bad' customers is false. The systems are in place to manage good and bad customers alike, and were not designed to manage only bad customers...

Whilst I would not pretend to know the ratio of good:bad transactions, it would be logical and sensible for banks to factor in the good transactions when making their pre-estimates. On the (purely guessed) assumption that the ratio is 1 bad transaction for 30 good transactions, the actual cost of correcting the mistakes comes down to something between 50p and £1.50

That is only my two penneth, and does not consider the fact that banks are required to treat each customer account as an individual account, as per the contract, rather than as a number among the millions of others...the contract is between the customer and the bank, and as such it is an individual contract and should be treated as such...

[Glenn UK]

Phoenix

I agree with what you say/

Re the ticket collector i think you will find that the fine is enshrined in law in the same way a parking ticket is. It has nothing to do with contract law in the same way that bank charges have.

It is a fine, a penalty for failing to buy a ticket, just like the fines for non-payment of road fund licence.

There are arguments about the morals of this bearing in mind we are talking about a private company and not a utility, but this is imho fundementaly different to the penalties imposed by the banks/cc companies.

JMHO

Glenn