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Banks will not have to deal with new complaints about unauthorised bank charges for another six months.

The Financial Services Authority (FSA) has extended the "waiver" on complaints about excessive overdraft charges because a test case is still going on.

The extension means the period of grace for banks will now end in January 2010.

Law Lords will rule on the latest stage of the test case in the autumn, but the legal battle is expected to continue for some time.

'Progress'

"Although the test case is progressing well, we still do not have certainty on this complex issue," said Dan Waters, director of retail policy and conduct risk at the FSA.

Our objective continues to be facilitating a fair and consistent resolution of consumer complaints about unauthorised overdraft charges."

This is the third time that the original waiver, first granted in the summer of 2007, has been extended.

All new claims against banks were effectively suspended in July 2007 when the Office of Fair Trading (OFT) and seven banks, along with the Nationwide building society, agreed to stage a test case to see if their controversial overdraft charges were legal or not.

Following a three-day appeal in the House of Lords in June, all parties are now waiting for their decision on whether to uphold the right of the OFT to regulate bank charges

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The Tories 'white paper' on banking reform, released today, is the first major political document to brand bank charges 'unfair' and would force overdraft, credit card and mortgage charges to be clearly shown.

Among details of the party's plans for sweeping financial reform, it says: 'There have been numerous examples of unfair treatment of consumers – the mis-selling of payment protection insurance and unfair bank charges.'
Although the Competition Commission restricted banks ability to charge PPI earlier this year, it is still unclear whether the OFT will win its legal battle with eight High Street banks over the fairness of bank charges.

If the case, currently in the House of Lords, drags on past the next general election, which the Tories are expected to win based on current opinion polls, it is unlikely a new Government would be able to intercede.

The Tories' white paper also details how the party would set up a new Consumer Protection Agency.

This will take over the oversight of consumer financial matters from the Office of Fair Trading (OFT) and other powers from the Financial Services Authority, which would be abolished.

Banks and credit card providers have to be clearer about their charges, the paper recommends, before saying the party will set-up an independent financial website highlighting whether individual products are any good.

Providers will have to include a standard 'summary box' on all documentation sent to customers, which should make it easier for them to compare products.

All very welcome, with a hint of deja vu...

This is Money's banking and credit card correspondent Alan O'Sullivan says: The fact that a major political party has come out and branded bank charges unfair should be celebrated although, given the legal case on charges is now in its latter stages, they could have stepped in sooner. If they had – and forced Labour into tagging along with them – then the entire legal debacle with the OFT could have been avoided through a Parliamentary vote.

Although the wider changes to the banking system outlined in the white paper smack as necessary, given the tripartite system's overall failure on banking regulation, it is still unclear whether the Tory plans will greatly help consumers on a day-to-day basis.

For example, what is this Consumer Protection Agency other than an OFT by another name? From anecdotal evidence, it appears the OFT takes quite a while to deal with consumer complaints, given the tidal wave it has to deal with.

It takes thorough investigation and time before it will ever 'name and shame' a company, and this only happens after said company has carried out particularly heinous crimes over a long period. But that's understandable, in a way, given the number of companies it has to regulate (125,000 with consumer credit licenses).

How will this CPA do things differently? More people and funding? We've heard all that before.

And the Tories plan to create an independent website over all financial products? The OFT promised in February 2008 to create a truly independent credit card comparison website for consumers – which we're still waiting for.

This is one reason why the status quo should perhaps be shaken up, but it also means these shiny new promises may be written on the same Whitehall headed notepaper.

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The legal debate raging in the House of Lords over banks' obligation to repay charges and fees to customers has thrown up a new anomaly that could alter the outcome of the case.

One of the banks' barristers, Jonathan Sumption, alleged in the House during the week that a consumer victory would cripple banks financially, forcing them to return billions of pounds in past overdraft charges and pay what he terms 'restitution'.
Marc Gander - the head of the influential bank charges lobbying organisation Consumer Action Group (CAG) - has interpreted this as meaning banks would not only have to refund any bank charges levied on customers: they may also have to repay any of the profit they earned from investing the funds in the interim.

If the Office of Fair Trading (OFT) wins its legal battle against eight High Street banks, any 'restitution' payment could substantially swell any potential repayments to customers, who could receive all their refunded charges as well as a portion of any profits the banks have made from investing them.

However, there is disagreement over what the legal term 'restitution' could mean and the impact this could have on the banks and their customers' claims. There is also debate over whether customers may be able to reclaim all charges levied over an extended period of 19 years in the event of an OFT victory, instead of just six years as previously thought.

The legal term 'restitution' means the claimant in any case must receive compensation that restores them to the same financial position they were in before their claim. However, it can also mean the defendant, in this case the banks, must hand back any profit made from the disputed funds, termed 'unjust enrichment'.

If banks' overdraft terms are found to be unfair, consumers may also be able to reclaim funds back as far as 1995 – the year European rules on consumer contracts came into force – and as far forward as six years after any judgment from the House of Lords, due this autumn.

Currently, customers can only claim back six years from the date of their claim.

Daniella Lipszyc, a contract specialist and director of Manchester-based law firm Ultimate Law, said there is a 'fair chance' claim periods may be extended, but dismissed the chances of consumers sharing in banks' profits as a 'flight of fantasy'.

She said: 'It may be arguable as a point of law, but the argument is obscure and I think there is little chance of claimants getting a slice of this. Restitution usually means a person just gets back the money they have lost.'

However Mr Gander, a former law lecturer, added: 'The banks wouldn't have made such a big deal out of this term if it just meant the repayment of charges. They're running scared and petrified of not just losing billions in bank charges, but the tens of billions in profits they made from them. Claims could literally balloon.'

It is difficult to price the possible fallout if banks lose their legal case, but Nationwide Building Society said during the week that 12.6m people paid overdraft fees across the industry in any one year. A survey by CAG of 10,000 claimants found the average bank charges claim has been worth £1,800 in recent years.

Any possible repayments could therefore cost the banks billions of pounds, which could be multiplied several times over if they are also expected to part with profits earned from these funds.

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The Office of Fair Trading (OFT) will still pursue bank overdraft charges as unfair, even if it loses the current legal appeal in the House of Lords.

The threat was made by Jonathan Crow QC, for the OFT, on the final day of an appeal before five Law Lords.

Seven banks and one building society are trying to overturn two previous rulings that would let the OFT investigate their overdraft fees.

Jonathan Sumption QC, for the banks, ridiculed the OFT's concerns.

He said they were part of a " developing saga" which he suggested had no basis in law.

Worried

Mr Crow ended his submission to the Lords by pointing out that the OFT was not just concerned about the high cost of bank charges.

The OFT was, he said, also worried about the way bank accounts and their charges operated in practice.

"This relates to the interplay between the amount and the fact the customer does not truly consent to the charges," he said.

He argued that bank customers were at a disadvantage at two stages: when they first opened an account and when they triggered the overdraft fees.

He listed some of the problems that bank customers faced.

He argued that they typically did not study the terms and conditions of their accounts; had no opportunity to opt out of their contract with their bank; could not work out in advance when the fees might be imposed; would find they were triggered without an explicit request to the bank for an overdraft; and often happened by mistake.

"The OFT is concerned that banks are capitalising on a mistake," he said.

'True consent'

The Law Lords will now consider their judgement and may refer some issues to the European Court of Justice.
That would further delay a final judgement on the OFT's jurisdiction, in a legal process that started in July 2007.

At stake is the currently frozen ability of millions of customers to demand that their banks refund overdraft fees they consider too high.

For the banks, an adverse judgement could lead to them repaying billions of pounds in past charges, and foregoing income of more than £2bn a year.

Jonathan Sumption rejected the OFT's reasons for keeping its campaign against bank charges going, even if it lost the appeal.

He said it was "quite impossible" for the OFT to use the concept of "true consent" in any further action over bank charges without re-writing the European directive on unfair contract terms.

"True consent is simply not the method by which the directive seeks to give effect to consumer choice," he said.

Bargain

During the morning of the third day of the appeal, Mr Crow attacked the banks' claim that their charges were so central to the operation of current accounts that they fell outside the scope of the 1999 consumer contract regulations.

The issue at stake is whether or not these regulations, which derive from European legislation, allow the OFT to scrutinise bank charges.

The banks argue that as their overdraft fees are part of the price paid by customers for having a current account, then they necessarily fall outside the scope of the regulations.

But Mr Crow argued that when people opened a current account "overdraft charges are not what is being sold as part of the bargain".

He said the crucial distinction that meant the 1999 regulations did in fact apply to bank charges was that current accounts did not involve any free negotiation between customers and banks.

There was "no meaningful consent", he said.

He went on to argue that overdraft charges could only escape the regulations if they were central to the bargain between bank and customer; were readily recognisable as the price of the service to the customer; and arose in the normal operation of the contract.

None of these conditions applied, he argued.

"Penal" conditions

Mr Crow accused the banks of "cosmetically rewriting" their terms and conditions in the past couple of years to disguise the penal nature of their overdraft charges.

He said that most banks had rewritten their terms and conditions to remove any suggestions that consumers were not allowed to go overdrawn and would be penalised for doing so.

One that still does is the Nationwide building society.

He pointed out that its terms and conditions stated explicitly that a customer can be expelled from membership for running up an unauthorised overdraft.

How could having an unauthorised overdraft be a central feature of having a current account under these circumstances, he asked.

Mr Crow went on to warn the five Law Lords hearing the appeal not to be scared of some dire warnings issued earlier by Mr Sumption.

He said it should not be assumed that the banks' current policy, of providing free current accounts to people in credit, was doomed if their appeal failed.

The structure of current accounts might just need to be adjusted, Mr Crow said.
He denied that victory for the OFT implied there would be a deluge of litigation in other industries where cross-subsidies were common in pricing tariffs.

He also said it was "assuming a great deal" to suggest that banks might have to automatically make huge refunds to their customers if they lost the current appeal.

"Banks will not necessarily have to reimburse everything", he said.

"The domestic courts will have to sort out the consequences," he added.

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The House of Lords has been told that banks are not "Robin Hoods in reverse" when they levy overdraft fees.

Seven banks and the Nationwide Building Society have started their Appeal to stop the Office of Fair Trading (OFT) regulating their overdraft fees.

Jonathan Sumption QC claimed the banks were not taxing the overdrawn for the benefit of others.

However, he told the Law Lords that overdraft fees involved a large element of cross-subsidy.

The outcome of the hearing may decide if millions of bank customers are able to reclaim billions of pounds in past charges from their banks.

'Fairness'

Mr Sumption, for the banks, argued that existing consumer contract regulations did not give the OFT the power to regulate prices.

He said that bank overdraft fees were required to be clear but were not necessarily required to be fair.

The High Court and the Court of Appeal have both previously upheld the right of the OFT to scrutinise the fairness of bank charges under the 1999 Consumer Contract Regulations.

Mr Sumption said both of the lower courts had been wrong, and had both over-refined and overcomplicated the interpretation of the regulations.

He pointed out that the regulations were not designed as a mechanism of price control and were not aimed at regulating what services were offered or the price charged.

They did not, he argued, apply to the main subject matter of a contract or the price being charged for it - only to ancillary or contingent charges.

"The overdraft charges are too fundamental to the bargain to be declared unfair," he said.

Cross-subsidy

He told the five Law Lords hearing the appeal that overdraft fees involved a large element of cross-subsidy.

People who went overdrawn without permission were paying part of the cost of providing current accounts to people who always stayed in the black.

So the charges exceeded the cost of dealing with an overdrawn customer because "the revenue stream is essential to the whole of the current account structure".

Mr Sumption explained that cross-subsidies were common in the banking industries of other countries such as France, Canada, Australia and the US.

He said they were common in the charging structures of many other complex sets of services such as airline ticket prices or mobile phone tariffs and were not objectionable.

One of the Law Lords asked if it was the case that bank charges included a surcharge to subsidise those who did not go into the red.

Another Lord suggested overdrawn customers were being taxed for the benefit of others.

But Mr Sumption said it was "tendentious nonsense" to suggest that banks were operating as Robin Hoods in reverse.

He went on to say that a victory for the OFT might render all past overdraft payments unenforceable and might lead to "restitution".

"The OFT has significantly raised the stakes," he said. "The issues are of considerable importance to consumers and the future of retail banking."

Earlier rulings

Mr Sumption spent the rest of the day picking apart the earlier rulings by the High Court judge Mr Justice Andrew Smith and the three judges in the Court of Appeal.

In particular, he said the Appeal Court had been "fundamentally wrong" to draw a distinction in the regulations between essential terms and prices, which could not be scrutinised by the OFT, and non-essential or incidental terms and prices - such as overdraft fees, which could be regulated.

"The distinction between core and non-core prices have no place in the regulations," he said.

"No such distinction can be found in the language of the regulations. All prices are by their very nature essential as the contract cannot work if the price is unenforceable."

Mr Sumption went on to describe the Court of Appeal's approach as "opaque and impractical" which might lead to "absurd" conclusions.

"The courts are not authorised to treat some prices as inessential," he said.

The hearing is expected to finish on Thursday.

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When this newspaper began its campaign against excessive bank charges in February 2007 the financial world was a very different place. It was before the credit crunch; before the nationalisation of Northern Rock; before the unprecedented state bailouts of some of the most famous banking names on our high streets. In those carefree days, few of us had heard of sub-prime mortgages or collateralised debt obligations.

When The Independent began to encourage bank customers to demand that these charges be refunded, the likes of Lloyds TSB, the Royal Bank of Scotland and HBOS made billions of pounds in profits each year. Now all that stands between these banks and insolvency is the hand of the state.

Yet, despite this traumatic humbling, the banks continue to fight for their right to levy these charges, bringing their case before the House of Lords yesterday. Over the coming days, five Law Lords will rule on whether the Office of Fair Trading has the authority to decide if these charges are fair or not.

Should the fact that the high street banks have been brought low have any bearing on the outcome of this case? Expect the banks and their defenders to argue that it does. They will claim that removing this income stream (which before 2007 yielded the sector some £2.5bn a year) will hasten the end of "free" banking in the UK.

We can predict this because this is the tune the banks have been playing since this saga began. The alternative to allowing the banks to impose hefty penalties is, we are told, monthly account fees for all, of the sort that are levied on the Continent.

We should not allow such threats to be a distraction from what has always been the central issue. The basic objection to these charges is not that they make the banks too much money, but that they are unlawful. The law, as outlined in the 1999 Unfair Terms in Consumer Contracts Act, says that banks cannot impose charges for services that are in excess of what it costs them to provide those services.

But the level of these charges is not set to cover the costs to the banks of unauthorised overdrafts and the like. It does not, for instance, cost a bank £40 every time one of their customers goes unexpectedly overdrawn. Independent analyses suggest the true cost is less than a tenth of this. These are penalty charges and, as such, they are breaking the law.

The question of the banks' revenues is another matter entirely. If the banks want to impose account fees to maintain their profit margins, let them make the case for this on its own merits. It is, though, hard to see them getting a receptive hearing from their customers in the present climate.

The banking crisis, far from supporting the case for bank charges, emphasises the extent to which the financial sectors enjoy an implicit guarantee from the state when it overreaches itself. Commercial banks have a tendency to privatise profits in the good times and socialise losses in the bad.

Given the implicit – and, at the moment, explicit – state guarantee the banks enjoy, the case for allowing them to levy punitive charges looks weaker than ever. It is bad enough to be gouged by a private company. But coming from businesses that we - as taxpayers - are required to support, it is surely an insult too far.

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Banking which is "free if in credit" was only made possible by the charges levied when customers went into unauthorised overdraft, the Lords heard.

Those charges "will necessarily exceed by a large margin" the real cost to the bank of dealing with unarranged overdrafts because they were "essential to the funding of the whole current account system", said Jonathan Sumption QC, for Barclays.

Mr Sumption was opening an appeal by seven major banks and a building society against High Court and Court of Appeal decisions that the charges come under "unfair contract" rules and are therefore subject to regulation by the Office of Fair Trading.

A final ruling from the House of Lords against the banks would pave the way for further hearings to decide whether the charges are fair and, if not, what a fair charge would be.

The result is awaited by tens of thousands of customers whose refund claims have been frozen while the test case goes through the courts.

Customers who go into unauthorised overdraft or breach their agreed limit can be charged as much as £35 or more for a single bounced payment. Campaigners claim the actual cost to the banks could be as little as £2.50.

If the banks ultimately lose the test case, it could cost them £2.6 billion a year in lost revenue and lead to their having to make refunds of up to £1 billion.

Before refund claims were frozen, some banks had already paid out more than £559 million to customers who complained about "rip-off" overdraft charges.

Members of the industry have warned that defeat in the House of Lords could lead to the end of free banking in the UK, with consumers having to pay a monthly fee or a fee for every transaction they carry out.

But many of the high street banks have already changed the structure of the fees they charge people who go into the red, with or without permission.

The test case to decide the legal issues thrown up by the dispute was brought jointly by the OFT and Abbey; Barclays; Clydesdale; Halifax Bank of Scotland and Lloyds TSB, which are now part of the same group; HSBC, Royal Bank of Scotland Group and Nationwide Building Society.

At the start of a three-day appeal hearing, Mr Sumption told Lords Phillips, Walker, Mance and Neuberger and Baroness Hale that free banking depended on the charges made when customers operated accounts which were not in credit or exceeded agreed overdraft limits.

This system of "cross-subsidy" existed in banks in many other countries, and in other service industries such as package holidays, mobile phone service provision, airlines and restaurants.

Mr Sumption argued that the terms of agreements between banks and their customers regarding overdraft charges were clearly expressed, but had been rendered "over-refined and over-complicated" by the earlier court decisions.

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Banks face an "appalling prospect" if the Office of Trading is allowed to rule that overdraft charges are unfair, the House of Lords has been told.

The banks would receive a deluge of litigation if the decision was made against them, the court has heard.

Five Law Lords are hearing an appeal by seven banks and one building society against judgements by two lower courts.

The lenders are challenging the right of the Office of Fair Trading to decide if overdraft charges are fair or not.

Prices

Jonathan Sumption QC, for the banks, said if the previous ruling in favour of the OFT was upheld, the banks would face a deluge of litigation with claims going back many years.

"That prospect is appalling," he said.

He said if the courts upheld the right of the OFT to scrutinise bank charges, then the charges might be deemed unenforceable for a time period dating all the way back to the 1990s.

That was because European Union regulations on unfair terms in consumer contracts had been introduced into UK law during that decade.

Alternatively, Mr Sumption argued, all personal current account contracts might become unenforceable in total.

At the core of the arguments is whether bank charges are exempt from the Unfair Terms in Consumer Contract Regulations (UTCCR) and whether the OFT can scrutinise or regulate the charges.

Mr Sumption argued that the price being paid by bank customers for the use of their overdrawn accounts was not something that fell under the above regulations.

"Does our case allow extortionate prices? Yes," he said.

"The remedy for extortionate prices lies in the domain of competition regulations, not in the domain of contract regulations."

'Consumer categories'

Mr Geoffrey Vos QC, for the Nationwide Building Society, supported the arguments of the banks.

In particular, he said, the Court of Appeal had been wrong in law to analyse the impact of overdraft charges from the point of view of consumers who stayed in the black.

He pointed out that of 54 million current account holders, 12.6 million paid overdraft fees in any one year.

That meant there were at least two categories of consumer - those who paid and those who did not pay overdraft fees.

"The typical consumer is one who pays, intends to pay, or expects to pay debit charges," said Mr Vos.

"The charges are clearly recognisable as the price for this service for the debit customers."

So, Mr Vos argued, the bank charges were necessarily exempt from the Unfair Terms in Consumer Contract Regulations (UTCCR) and the OFT could not scrutinise or regulate them.

'Consumer protection'

Mr Jonathan Crow QC, representing the OFT, spent the afternoon rejecting some of the assertions of Mr Sumption and outlining the case for the OFT.

He denied that the OFT was trying to conduct price control and said it was interested in consumer protection, which was the other side of the coin from the operation of competitive markets.

"We are looking at market failure because the consumers are not thinking about banking charges and banks can raise their charges without losing customers," he said.

He said there was no justification for the banks' suggestion that the OFT should use competition law rather than consumer contract regulations if it was worried about overdraft charges.

He pointed out that going to the Competition Commission was not a route available to ordinary consumer.

However, the consumer contract regulations did give consumers rights they could pursue in national courts.

Investigation goes on

Mr Crow went on to justify the OFT's intended use of the consumer contract regulations to scrutinise the fairness of bank overdraft charges.

"Price terms have not been given some kind of ring-fenced status," he said.

"Price clauses have not been carved out from the application of the regulations."

He went on to assert that overdraft terms could still be assessed for their fairness for reasons other than price, for instance if customers were taken by surprise.

He told the Law Lords that the OFT's current investigation into overdraft charges would continue even if it lost the current appeal.

"The OFT investigation will proceed irrespective of the outcome of this appeal because the relevant overdraft terms are still assessable to fairness," he said.

Mr Crow denied that a victory for the OFT in this appeal would lead to a disastrous upheaval for the UK's banking system.

He said the OFT was looking not only at the size of overdraft charges but how they were applied and how they affected customers. The OFT might, for instance, seek variation of bank interest rates associated with overdrafts.

The hearing is expected to end on Thursday.

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The latest round in the legal row over the legality of bank charges for unauthorised overdrafts started today, as banks took their appeal to the House of Lords.

Seven banks and a building society are asking the law lords to overturn rulings by the high court and court of appeal that the fees are covered by "unfair contract" rules and can be scrutinised by the Office of Fair Trading (OFT).

Banks have been charging consumers up to £39 every time they bounce a cheque or refuse a standing order or direct debit because of a lack of funds, although critics of the system say the actual cost incurred by the institutions could be as little as £2. The fees are estimated to earn current account providers about £2.6bn a year.

After thousands of consumers reclaimed the charges by threatening to take their banks to court, a test case was brought between the OFT and Abbey, Barclays, Clydesdale, Halifax Bank of Scotland and Lloyds TSB (which are now part of the same group), HSBC, Royal Bank of Scotland Group and Nationwide building society.

The court found in favour of the OFT, then earlier this year a ruling by the court of appeal backed it up and it looked as though current account providers could be forced to return up to £1bn to consumers.

This could be the final chance the banks have to get the decision overturned and avoid having to cut their charges and refund customers. The appeal is set to last three days, but the decision is unlikely to be published until the autumn.

In the meantime, the banks will be able to continue charging, and tens of thousands of customers will have their appeals kept on hold.

A waiver granted by the Financial Services Authority (FSA) in the summer of 2007, when the test case was first announced, means banks and building societies are allowed to hold on to any complaints relating to the case.

Consumer groups had hoped the banks would accept the appeal court's ruling. The chief executive of Which?, Peter Vicary-Smith, said: "It is disappointing that nearly two years since this saga began, little has changed for the millions of consumers being hit with these charges."

He added: "If you're struggling with basic living costs such as rent and utility bills then you may be eligible to get your claim fast-tracked under the terms of the waiver. The FSA must take action against any bank ignoring the financial plight of its customers."

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Consumer campaigners want the Financial Services Authority (FSA) to crackdown on banks who have sent in debt collectors after customers who have disputed unfair overdraft charges.

These customers have had their complaints shelved for two years by the banks because of a waiver authorised by the FSA.
This waiver has left thousands of current account customers who disputed rip-off bank charges stuck in limbo, while racking up fees and interest.

Some are being chased through the courts, hounded by debt collectors and are having black marks put on their credit history.

The waiver was put in place by the FSA on July 27, 2007. Initially, it was for just 12 months while a court case between the banks and the Office of Fair Trading (OFT) was argued.

However, almost two years later, this case is still being fought, despite High Court and Appeal Court judges ruling the OFT can decide on whether bank charges are a breach of unfair contract terms.

Next Tuesday will see the latest twist in the saga as the banks take their case to the House of Lords. The result of this is not likely to be known for several months at best. This will pile on the misery for customers who have racked up thousands of pounds worth of charges, which they claim had sent them massively overdrawn.

Marc Gander, from the Consumer Action Group, says: 'It is the banks that sought the shelter of the FSA and wanted the waiver to be placed on complaints and it is the banks who wanted to contest the charges in the court and get a legal ruling on them.

'It is unacceptable that they should be involved in litigation against their customers and chasing them for charges that are in dispute when they have acknowledged there has been no decision on whether the charges are lawful.'

Banks have to resolve cases where there is financial hardship.

Under the terms of the waiver, banks can still look at complaints, but they choose not to.

The British Bankers' Association insists it is within its rights to pursue customers who have not repaid debts.

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