The OFT is suing First National Bank, which was acquired by Abbey National four years ago, over a "standard contractual term" the firm uses in HP agreements used by customers to buy consumer items such as washing machines and fridges.
The OFT wants the bank to change a clause which allows it to keep charging interest to customers who have already gone to court to show they cannot keep up payments. Use of the clause can mean debts continue to grow even after a court has judged them to be unaffordable.
It is the first time the OFT has gone to court under legislation introduced in 1995 to enable the regulator to negotiate with companies over consumer contracts that it regards as unfair.
First National has refused the OFT's request to change its particular contract terms, and is determined to fight the OFT in court.
A spokeswoman for the OFT said on Friday: "This is the first time we have ever gone to court on this legislation. This is a big deal for us."
The legislation concerned is the Unfair Terms in Consumer Contracts Regulations 1994. The row is centred on an obscure legal term "interest after judgement", which affects millions of people who take out consumer loans to buy goods in high street stores.
First National has three million customers and provides loans through intermediaries such as high street stores for people buying household goods. The loans are usually at or near credit card rates.
The OFT has been trying since last year, following a number of complaints from consumers, to get First National to change the clause.
When the courts have issued a County Court Judgement in the cases concerned, they have usually specified that the customers should pay a lesser, regular payment to First National, such as pounds 10 a month.
However, under the "interest after judgement" clause in First National's contracts, First National has been able to continue charging interest on the customer's loan even after the court has passed judgement.
In other words, the interest will continue to accumulate, while the customer is only paying a reduced amount. Therefore the customer will never pay off the debt, which will continue to grow in perpetuity.
A spokeswoman for the OFT said: "We have been trying to negotiate with First National to change these terms. They have refused to do so. Therefore we have issued them with a writ. We have changed over 3,000 terms since [the legislation in 1995] so it's a big deal for us.
"We hope to get an injunction to have these unfair clauses removed," she added.
The two parties will attend the High Court in the Strand on Wednesday for a preliminary hearing. First National last Friday made clear its determination to fight the OFT application.
The Abbey National subsidiary said: "The bank's case is that the term which keeps interest running after a court judgement has been obtained is not in any way unfair."
Phillip George, the managing director of First National, said: "Customers taking consumer finance necessarily pay interest. The OFT, in challenging the effect of this clause, is preferring customers who don't pay in favour of those who pay regularly and on time.
"The basis of their argument would allow non-payers who have a court judgement against them to cease paying interest on the money they owe to the bank, while paying customers continue to pay interest on their loans until repaid in full."Reuse content