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Bank customers could be in line for a £1 billion refund after a significant ruling in the High Court over unfair charges.

The charges made for going overdrawn and bouncing a cheque were found to come under “unfair contract” rules, raising the prospect banks will have to repay millions of account holders.

Consumer groups hailed the decision in the first round of a test case as victory against charges of up to £35 each time customers exceed their limit, when they estimate it costs a bank just £2.50.

The Office of Fair Trading and High Street banks bought the case after a widespread consumer campaign saw customers reclaim more than £550 million through the courts.

However, the decision raised concerns banks will now end free current accounts to recoup the estimated £3.5 billion a year they take from charges.

Martin Lewis, of MoneySavingExpert.com, who has led the campaign against charges, said: “This is a real victory for bank charge reclaimers. “Banks currently charge £35 for what is an automated letter printed off the computer.

“What does it really cost? Some generous people say £4, I say around £2.”

Liberal Democrat Shadow Chancellor, Vince Cable added: “This is great news. However, it is only the first step in what will be a very long journey. “The massive penalty charges imposed are yet another example of the major banks taking consumers for a ride.

“The banks can receive unrivalled guarantees and support from taxpayers when things go wrong, but continue to make huge profits at the expense of their customers.”

advertisementThe OFT has argued the charges are unfair and count as penalties, while banks have said they are reasonable fees for setting up an overdraft.

A quarter of current account holders are estimated to receive charges each year and thousands of claims are currently frozen in the courts until a decision on whether charges are unfair and what a fair level would be.

Both the OFT and the British Bankers’ Association (BBA) said they would digest the lengthy ruling before deciding on next steps.

An OFT spokesman said: “This is an important early milestone for the OFT and our investigation into this area of high consumer interest.”

A second hearing is now likely where a judge will finally rule whether the charges are indeed unfair, and what a fair level would be.

But there were warnings a loss by the banks would see an end to free banking, with even customers in credit instead having to pay a monthly fee or a fee for every transaction they carry out.

A spokesman for Which?, the consumer organisation, said: “It wouldn’t be a surprise if they try to recoup any money they might lose from this.”

David Black, a consultant at Defaqto, said: “If, as seems likely, a cap is imposed on unauthorised overdraft charges, I view it as inevitable that the current account options will change for consumers.”

Angela Knight, chief executive of the BBA, said the ruling was only a very early step and people should not prejudge what banks would do.

Individual banks will not say how they face paying back, but analysts have predicted if they lose the next case they may be forced to pay out £1.1 billion in total.

In his ruling, Mr Justice Andrew Smith said the decision did not mean that the charges were necessarily unfair, or that the bank terms were not binding.

He ruled against the OFT’s claim that the charges were unenforceable penalties, but agreed they could not be assessed for “fairness” under the regulations.

The timetable for the next steps of the case will be outlined next month, but analysts predicted the banks and the OFT may both appeal against the parts of the case they lost.

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