Claim Bank Charges Back - Helping you to reclaim Unfair Bank Charges!

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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Banks and building societies could be forced to return billions of pounds to consumers after a court threw out their appeal over unauthorised overdraft charges.

The court of appeal ruled that fees for unauthorised overdrafts and bounced cheques are subject to regulation by the Office of Fair Trading (OFT) under "unfair contract" rules, clearing the way for the watchdog to set a legal maximum on the fees which currently earn banks around £2.6bn a year. The ruling could result in them being forced to return up to £1bn to consumers.

Banks had been charging up to £39 for a bounced cheque, standing order or direct debit, although critics of the system say the actual cost incurred by the institutions could be as little as £2.

The ruling follows a test case last year between the OFT and eight current account providers concerning fees for unauthorised borrowing and bounced cheques, which concluded they were covered by the Unfair Terms in Consumer Contracts Regulation of 1999.

Since then many current account providers have adjusted their charging structure and reduced their fees. But many still charge more than £12, which the OFT set as a maximum default charge on credit cards and could introduce to the current account market.

In today's judgment the master of the rolls, Sir Anthony Clarke, sitting with Lord Justices Waller and Lloyd, held that the charges for unauthorised overdrafts were not part of the "core or essential" bargain between bank and customer, and therefore an assessment of fairness was not precluded by the regulations.

Waiting on an appeal

Although the banks could apply to the law lords for permission to appeal to the House of Lords, they were not given leave to appeal, a point welcomed by Doug Taylor, a campaigner for consumer group Which? who said he hoped the banks would throw in the towel.

"I think that is a clear sign it is a fairly straightforward case," he said. "In the context of the decline in [the banks'] reputation it would be bizarre if they decided to appeal. For them to engage in spending more money to defend a lost cause would be unfortunate to say the least."

Lawyers for Which? said the banks had 28 days to decide if they would make a further appeal, but in the meantime the OFT will continue to examine the charges. Consumers who have had their requests for fees to be returned put on hold since the test case will have to wait for the OFT's ruling before they know how much they can reclaim.

The OFT welcomed what it called "very clear confirmation" that it could assess current account terms and conditions on fairness. "This judgment confirms the OFT's long-held interpretation of this important aspect of consumer law, and is one that consumers themselves would identify with. It is also relevant to businesses across the whole economy," it said.

An OFT spokesman added: "The judgment means we can go forward and we are now looking to go back to the banks to say whether we think the charges are fair." A decision on fairness is expected later this year.

Consumer Victory

Martin Lewis, the founder of MoneySavingExpert.com, who alongside Guardian Money has been a campaigner against the charges, said it was a "fantastic day" for consumers.

"All gates to victory have now been unbarred; there is now just a tiny latch left to be unlocked," he said. "The smiles on the OFT's faces in court shows it is highly likely it will find that charges are unfair. After that I would hope that within the next year everyone who has had charges unfairly taken from their bank account will get them back."

Lewis said 5.6bn template letters had been downloaded from his website by consumers seeking a refund from their current account providers. A waiver put in place in the summer of 2007 allowing banks and building societies to delay dealing with the letters remains in place, and the Financial Services Authority has not indicated when it will be lifted.

However, Which? said people should continue to send in their requests so they are first in the queue if the OFT does force account providers to repay the fees. Thousands of consumers are believed to be stuck in the court system awaiting the final outcome of the case and payouts, which in some cases could amount to thousands of pounds.

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Thousands of current account switchers face greater confusion and higher charges as banks scramble to make their account fees more transparent ahead of an Office of Fair Trading penalty charges ruling.

Instead of offering transparency the different methods that banks now use to charge for overdrafts are leaving consumers facing a harder task to compare like-for-like, consumer bodies warn.

Halifax has just unveiled a revamp that will see new standard current account customers shell out a daily fee of up to £2 for an ordinary agreed overdraft, and £5 a day for any unauthorised borrowing.

The bank's Reward account, to be offered from early February to all new customers paying in at least £1,000 a month, will effectively punish those who only dip into their overdrafts because the monthly cost of a £10 overdrawn balance will be the same as for £1,000.

The new fees will also be foisted upon all the bank's existing Moneyback current account customers.

"For anybody with a small monthly overdraft of £100, say, the cost of this from February will be as much as £20, a very expensive sum," warns Michelle Slade, spokeswoman for financial data analyst Moneyfacts.

On the plus side, those who stay in the black will now receive £5 every month in their account instead of interest.

Halifax, shortly to be swallowed up by Lloyds TSB, is the latest bank to abandon its existing interest and fees structure and impose what it calls a new, easier-to-understand set of sheet of charges. "The idea is to get rid of confusing interest rates and make it much more transparent," a spokesman said, stressing that the thrust will be on "simplicity". It is expected that all its current account customers will move to a daily overdraft charging fee in 2009.

Shake up

Halifax is the latest bank to shake up the way it charges customers to run their current accounts, and follows similar moves made over the past 12 months by Barclays and Alliance & Leicester.

A&L customers with authorised overdrafts have stopped paying monthly interest of up to 17% and now pay a daily 50p charge instead up to a maximum of £5 a month. Barclays has launched its Personal Reserve where, for a flat £22 fee, customers have a safety net embedded in their accounts giving them five days without extra charge if they bust their agreed overdraft limit.

Sophia Ostler has been in a bitter wrangle with Barclays bank for months. The 24-year-old charity worker is disputing a series of charges and overdraft penalties unknowingly racked up over a number of years, and has come to the end of her tether.

"I was going nowhere and turned to the ombudsman, before Barclays offered me £200; it's not as much as all the charges but I decided to accept it. I am completely fed up and will definitely switch to a different bank as soon as I can in the future; the 'least worst' that I can find. My experience has really set me against banks."

Although each bank has denied its overhaul is linked to an ongoing OFT investigation into penalty charges on current accounts, many in the industry think otherwise. "All these moves are due to the drive for much more openness and transparency ahead of the OFT court case with banks over penalty bank charges, to show that such changes are now being made," says Andrew Hagger of price comparison website Moneynet.co.uk.

It is a bid to show willing and soften the impact if the OFT wins, agrees Slade. "It's a preventative move, with more banks moving towards this kind of account to simply get something in place to show regulators if they come down heavily on them," she says.

The high court case has set the OFT against banks over the size and legality of current account penalty charges of up to £38 for breaching an overdraft by as little as £1. Earlier in the year the first victory was given to consumers as judges ruled that current account fees were subject to rules of fairness. The banks have lodged an appeal against this decision and a ruling is expected early in January, although the full court case is expected to drag on for months.

There is concern that an eventual victory for consumers could prompt the banks to introduce charges for all daily banking transaction to claw back lost cash. However, attempts by Halifax and others to introduce different charging patterns are in danger of bamboozling customers, says Kevin Mountford, head of current accounts at Moneysupermarket.com.

"We've had Halifax's plans, which are different from Barclays that are different again from A&L," he says. "It's getting harder and harder to do a like-for-like comparison, which is what most consumers rely on to choose between one financial product and another."

With a straight comparison of the interest charges on overdrafts, consumers can rely on a simple compare-and-contrast test, he adds. "There's a danger that current accounts could carry on down this route and end up like the credit card market where there's just too much confusion," he says.

These growing layers of complexity are a key reason behind the still sluggish current account switching market.

An OFT study found that just 6% of customers had actually bothered to switch current accounts in the 12 months to July 2008. This was "one of the lowest rates in Europe", it said. Relatively few of the UK's 54 million current account holders actively monitored the relative competitiveness of their current accounts, it said. Worse, only one in 20 said they always on the lookout for a better deal and made an effort to keep up-to-date with changing offers.

Mountford suggests that fear of a chaotic administrative spell for your bank account, with direct debits disappearing into a black hole, lay behind the shockingly low numbers. "Switching bank accounts is sadly still a clunky process with worries of salary payments going missing."

Such fears continue to deprive consumers of major savings. The OFT study shows how a customer typically in credit without an arranged overdraft who regularly switches from an average current account to the best-performing rival will save £56 over a year, and a switch from the worst-performing account to the best would bring in £63. Even better, a switch for a heavily indebted customer without an arranged overdraft from the most expensive account to the cheapest would save £112 over the year.

Anyone who has stuck with the same provider for several years should run a keen eye over their account details, and be prepared to put in some hard research; if you're getting the risible 0.1% on any credit balance or being charged an overdraft rate in excess of 16%, it's probably worth looking at the possibility of an instant switch.

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Halifax current account customers could find themselves paying up to £2 a day for authorised overdrafts, it emerged today.

The bank, which is set to become part of Lloyds TSB, unveiled the Reward current account at the weekend, claiming it was "based on simplicity" and offered "an even better deal for customers". However, customers with small overdrafts could lose out as a result of the change.

The account, which will be launched in February, will favour borrowers who rack up hefty overdrafts as the monthly cost of a £20 overdraft will be the same as one at £2,000.

The account, which replaces the standard current account and high interest current account from 9 February, will also abolish the old fees and interest structure and implement a new £5 "post-tax" credit to all customers who pay in at least £1,000 a month, regardless of whether they are in credit or overdrawn.

Existing cutomers with the Moneyback account will be switched to the new deal.

A Halifax spokesman said: "The idea of the account is to get rid of confusing interest rates.

"All the traditional arranged and 'unarranged' overdraft fees and interest rates will be replaced with a daily fee."

These fees are currently as high as £28 a month for an unauthorised overdraft with Halifax's existing high interest current account, or £35 for a paid or unpaid item charge.

With the Reward account a customer with an arranged overdraft will pay £1 for each day they are overdrawn, regardless of the size of their debt, up to £2,500. Above this limit the cost will double to £2 a day. Customers with unauthorised overdrafts will face a fine of £5 a day.

Plenty of careful current account customers with small debts could lose out, warned Michelle Slade at financial information provider Moneyfacts. "If you had a £100 overdraft, then it will cost you £20 a month - that is very expensive," she said.

Slade said the offer of £5 a month credit would benefit anyone with up to £2,500 in the account, but account holders with more money would be better off elsewhere. At Alliance & Leicester, for example, current account customers can earn 6.31% on balances.

"Say you had £2,500 in your current account, you'd earn roughly three times as much interest each month at A&L; nearly £15 instead of £5," said Slade.

Halifax's new fee structure echoes those made by rivals earlier this year. Barclays, for example, introduced an unauthorised "personal reserve" overdraft charge on its current account, whereby customers can dip into a personal reserve as often as they like over five days for a flat fee of £22.

The changes come as the banks appeal against the results of a high court case against the Office of Fair Trading (OFT) over bank charges, which found that penalty charges were subject to rules of fairness. If the banks lose their case the OFT could introduce a maximum level for unauthorised overdrafts.

"All these moves are largely down to a drive for greater transparency ahead of the court case with banks over penalty bank charges," said Andrew Hagger of price comparison website Moneynet.

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Banks will not have to consider giving refunds to customers who complain about unauthorised charges for at least six months, the City watchdog said today.

The Financial Services Authority (FSA) has granted an additional waiver enabling banks to ignore the complaints until at least January 26 next year.

The regulator originally put a waiver in place last July following an announcement from the Office of Fair Trading (OFT) and eight major banks that they would seek a high court ruling on whether the charges were fair.

The OFT won the first leg of the process earlier this year when the court ruled that the charges came under its jurisdiction, but the banks are appealing against the decision.

Last week, the OFT said banks were making £2.6bn a year from customers having insufficient funds in their accounts.

It wants to challenge the level of fees charged by current account providers, which can be as much as £40 for each bounced payment or unauthorized withdrawal.

The FSA has made changes to the waiver - under the new rules banks must not make any changes to the level or structure of unauthorised overdraft charges without the watchdog's permission.

They must also consider the claims of customers at risk of falling into financial difficultly because of charges.

The consumer group Which? described the waiver as a "necessary evil". Head of campaigns, Louise Hanson, said: "Scrapping it won't get people their money back - only the banks can do that by conceding defeat and paying up instead of continuing to string out the process."

Lifting the waiver would actually cost customers money, Hanson warned, as although consumers can claim charges dating back to July 2001 while it is in place, a six-year limit on claims will resume when it is removed.

"The clock would start ticking again on people's claims even though they've no prospect of getting their money back until this whole issue is sorted out," Hanson added.

Before the waiver was put in place, millions of template letters were downloaded by bank customers seeking to reclaim charges they had made for bounced payments and unauthorised withdrawals.

Banks refused to contest the claims in the courts and some customers were able to reclaim thousands of pounds they had paid in fees.

Even if the banks lose their appeal and the waiver is lifted it is unlikely customers will be able to reclaim as much in the future - instead of repaying the full amount charged banks are likely to cap repayments at the amount above the level of an agreed "fair" charge

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Lloyds TSB has hit a 19-year-old foreign student with bank charges of £660 after he went £58.61 overdrawn, re-igniting the controversy of "greedy" bank charges just days before the Office of Fair Trading is due back in court to continue its legal battle against the big banks.

The fees, imposed on Bayar Lkhagvajav, a Mongolian studying English at a London college, are close to an entire year's average income in his home country.

Lkhagvajav came to London last September from Mongolia to improve his English. He needed a bank account for the money his parents were due to send him to cover college fees and living expenses. But the money coming in is now paying bank penalty charges instead.

As a result, he spent part of this year sleeping on friends' sofas and scrounging food wherever he could.

When he arrived in the UK, he could only speak basic English. His college suggested opening an account at Lloyds TSB in Kings Cross, London.

He admits, in a written statement to Guardian Money, that he was naive, signing an agreement "in good faith, without understanding the documentation fully, but believing what I was given to be in my best interest".

Lloyds TSB said he was with friends, one of whom had good English and appeared to interpret for him when the account was opened.

He first became overdrawn last November - to the tune of £1.86. Although he had paid in nearly £500 three days previously, it arrived in his account 24 hours too late due to the long clearing process. For being £1.68 in the red for one day, he was charged £21 in January.

In November, the bank says it introduced "tools to help our customers take control of their cash and avoid overdraft fees altogether. All customers who accidentally slip into the red or go over their overdraft limit will be given a grace period in which to put things right. Provided they contact the bank and make arrangements to correct things before 3.30pm that afternoon they will not incur any charges".

But Lkhagvajav was unaware of this clause. He also admits he was careless from time to time, including allowing a friend to borrow money from his account with his debit card.

"I now know this was wrong, but I thought that he could not take out more than I had [in the account]," he says.

But part of the reason for his overdraft is that Lloyds TSB was charging him £7.95 a month for a "silver account" for a range of services he could not use. This packaged account gave European Travel Insurance (which he could not use due to visa restrictions), mobile phone insurance (he had no phone), car breakdown cover (no car) and other services inappropriate for his needs. The bank has since repaid the silver account fees.

When his account went £58 overdrawn, the bank wrote to him, but he had changed his address. It was not until three months later that he caught up with his mail.

During those four charging periods, a time when the account was not used, the bank hit him with £165 a month in charges. This was calculated at £15 per month plus £15 for each day overdrawn, with a maximum 10 charging days a month.

UK based students are given large free overdrafts - Lloyds TSB offers up to £1,500 - but he did not qualify for a student account as he had not been in the UK for three years. The bank did not offer him a "buffer zone" or an agreed overdraft.

In total, his charges mounted up to £660, but the bank agreed to withdraw the fourth month's charge of £165 "to help him get his finances straight", although this still left him having to pay £505 for his £58 overdraft.

Lloyds TSB says: "The overdraft pricing structure is very clear and we advise customers who find themselves in an unplanned overdraft position to contact us immediately so that we can help. When he opened his account we were able to explain our overdraft structure to him through a friend who spoke excellent English and had opened an account with the same member of staff the day before. The bulk of the charges that have been levied on his account relate to an incident where he claims that his card was used without his consent by one of his friends. At no point did he alert the bank that the card had been stolen.

"We sent letters in January, March, April and May, again advising him that he was incurring charges and urging him to make contact with the bank. However, he did not address the matter of his overdraft until April."

The Office of Fair Trading expects to resume its fight against excessive overdraft fees from the big banks in the courts later this month.

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Bank customers hoping to reclaim billions of pounds in "unfair" bank charges could have to wait years to receive rebates after the banks lodged an appeal against a court ruling yesterday.

Last month, a judge ruled that bank charges for breaching overdraft limits were subject to regulation by the Office of Fair Trading under unfair contract rules.

But at a case management hearing yesterday, commercial judge Mr Justice Andrew Smith indicated he would give the banks leave to appeal against his earlier ruling which had opened the door for the OFT to challenge the controversial bank fees.

Consumers had hoped the earlier ruling would lead to a cap on the fees and allow them to reclaim excess charges paid over the past six years. However, the case will now go to the court of appeal, delaying any rebates.

The OFT has been investigating the charges for a year and yesterday was asked by the judge when it might conclude its work. After initially indicating that it had no idea when the investigation would be completed, the OFT indicated it was working to a July timetable.

In a statement, the OFT said it "recognises that this is an issue of major public interest.

"It is also a complex legal process with a number of steps. The OFT is committed to ensuring that the process moves forward as quickly as possible to resolution and is taking all necessary steps working together with the interested parties."

It said it aimed to be ready to talk to the banks in July about its preliminary views on whether the charges were fair. It would then identify what would be its next step.

According to the OFT, banks earn up to £3.5bn a year, or nearly £10m a day, from fees on unauthorised overdrafts. They charge up to £39 for each bounced payment, when the actual cost to the bank may be as little as £2.

This prompted the competition watchdog to launch its investigation of the charges. But the banks agreed to a test case after they faced thousands of claims from disgruntled account holders in the county courts.

The test case should determine whether the OFT regulates the bank charges, though this question is now the subject of the appeal by the banks. It should also decide whether the charges are fair, which is the subject of the investigation by the OFT.

Before the test case was announced last summer, more than 1m form letters were downloaded from websites by consumers hoping to claim back charges.

In some cases, customers were able to win back thousands of pounds from the banks, which refused to contest the claims in court. Banks are thought to have repaid about £500m so far.

The British Banker's Association, on behalf of the current account providers, noted yesterday that the court had adjourned until today. It said: "Once the precise terms of this permission are agreed tomorrow the banks will progress the appeal with expedition. A further statement will be issued at the conclusion of the hearing." The OFT also promised a further statement today

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Bank customers hoping to reclaim billions of pounds in "unfair" bank charges could have to wait years to receive rebates after the banks lodged an appeal against a court ruling yesterday.

Last month, a judge ruled that bank charges for breaching overdraft limits were subject to regulation by the Office of Fair Trading under unfair contract rules.

But at a case management hearing yesterday, commercial judge Mr Justice Andrew Smith indicated he would give the banks leave to appeal against his earlier ruling which had opened the door for the OFT to challenge the controversial bank fees.

Consumers had hoped the earlier ruling would lead to a cap on the fees and allow them to reclaim excess charges paid over the past six years. However, the case will now go to the court of appeal, delaying any rebates.

The OFT has been investigating the charges for a year and yesterday was asked by the judge when it might conclude its work. After initially indicating that it had no idea when the investigation would be completed, the OFT indicated it was working to a July timetable.

In a statement, the OFT said it "recognises that this is an issue of major public interest.

"It is also a complex legal process with a number of steps. The OFT is committed to ensuring that the process moves forward as quickly as possible to resolution and is taking all necessary steps working together with the interested parties."

It said it aimed to be ready to talk to the banks in July about its preliminary views on whether the charges were fair. It would then identify what would be its next step.

According to the OFT, banks earn up to £3.5bn a year, or nearly £10m a day, from fees on unauthorised overdrafts. They charge up to £39 for each bounced payment, when the actual cost to the bank may be as little as £2.

This prompted the competition watchdog to launch its investigation of the charges. But the banks agreed to a test case after they faced thousands of claims from disgruntled account holders in the county courts.

The test case should determine whether the OFT regulates the bank charges, though this question is now the subject of the appeal by the banks. It should also decide whether the charges are fair, which is the subject of the investigation by the OFT.

Before the test case was announced last summer, more than 1m form letters were downloaded from websites by consumers hoping to claim back charges.

In some cases, customers were able to win back thousands of pounds from the banks, which refused to contest the claims in court. Banks are thought to have repaid about £500m so far.

The British Banker's Association, on behalf of the current account providers, noted yesterday that the court had adjourned until today. It said: "Once the precise terms of this permission are agreed tomorrow the banks will progress the appeal with expedition. A further statement will be issued at the conclusion of the hearing." The OFT also promised a further statement today

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Current account providers are to appeal a court ruling over overdraft charges that looked set to allow consumers to reclaim billions of pounds, it was reported today.

Last month, a high court judge ruled that the charges came under the Unfair Terms in Consumer Contracts Regulation 1999, paving the way for the Office of Fair Trading (OFT) to challenge current fees.

According to the OFT, banks receive up to £3.5bn a year in unauthorised overdraft fees - nearly £10m a day.

They charge up to £39 for a bounced cheque, standing order or direct debit, and critics of the system say this does not reflect the actual cost incurred by the banks, which could be as little as £2.

Consumers had hoped that the ruling would lead to a cap on the fees and allow them to reclaim excess charges paid over the past six years.

However, a report in today's Financial Times said the seven banks and one building society involved in the test case against the OFT were planning to appeal Mr Justice Andrew Smith's ruling.

It said the OFT was unlikely to contest any appeal, which will see the case referred to the appeal court.

A court hearing is due to take place tomorrow during which the OFT and the eight organisations involved in the case - Barclays, HSBC, Lloyds TSB, the Royal Bank of Scotland, HBOS, Abbey, Clydesdale and Nationwide building society - will announce their decision.

The British Bankers' Association and individual banks involved in the case refused to comment on the report, saying they would make statements after tomorrow's hearing.

Prior to last summer, more than 1m reclaim letters were downloaded from websites, and in some cases customers were able to win back thousands of pounds from the banks, who refused to contest the claims in court.

Around £500m is so far thought to have been repaid.

However, since the test case was announced the Financial Services Authority has allowed all current account providers to put complaints over charges on hold.

The appeal could delay repayments of overdraft fees for several years and cause hardship to thousands of customers, many on low incomes.

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High street banks could be forced to return billions of pounds in overdraft fees to customers after a high court judge said the charges could be challenged by the Office of Fair Trading.

Campaigners hailed the judgment as a victory over the banks, which they accuse of profiteering at the expense of current account holders who are penalised for unauthorised overdrafts.

Mr Justice Andrew Smith agreed with the OFT that charges were covered under rules governing the Unfair Terms in Consumer Contracts Regulation 1999.

Which?, formerly the Consumers Association, said the decision vindicated its long-running campaign to bring down overdraft charges, which can amount to thousands of pounds. The consumer group believes the estimated £9bn of charges levied over the past six years should be repaid if the OFT finds they were levied unfairly.

The ruling paves the way for a crunch hearing next month when the court will decide whether the charges are unfair and, if so, what a fair charge should be. A bar on court action by consumers imposed by the City regulator, the Financial Services Authority, could also be lifted.

Which? said the FSA should lift the bar immediately to let customers reclaim charges. The banks have threatened to introduce annual fees on all current accounts if they are forced to pay compensation and accept swingeing cuts in overdraft charges. City experts said the current banking crisis, which has left all banks desperately short of funds, would push the banks to continue their fight. They said shareholders would expect the banks to fight the ruling in the appeal court and the House of Lords.

An appeal could delay repayments of overdraft fees for several years and cause hardship to thousands of customers, many on low incomes. The OFT says banks receive up to £3.5bn a year in unauthorised overdraft fees - nearly £10m a day.

They charge up to £39 for a bounced cheque, standing order or direct debit. Critics of the system say the actual cost to the banks could be as little as £2.

The 200-page ruling examined current account agreements offered by seven major banks - Barclays, HSBC, Lloyds TSB, the Royal Bank of Scotland, HBOS, Abbey, Clydesdale, and Nationwide building society. The OFT argued that under consumer protection legislation, it could determine whether the fees were levied clearly and fairly. It began to examine the charges in 2006 after a successful campaign to reduce credit card penalty fees.

More than £500m in fees was repaid by banks following a wave of consumer complaints. By spring last year, all the banks were facing a string of county court cases brought by customers. More than 1m pro-forma letters enabling customers to apply for refunds were downloaded from consumer websites, and some won back thousands of pounds from the banks, which refused to contest the claims in court. HSBC admitted it had repaid £11m of fees and could face claims for a further £300m. To resolve the issue, the banks agreed to fund a test case with the OFT in the high court.

The banks told Mr Justice Andrew Smith they were within their rights to charge the fees, which were advertised in the terms and conditions for their accounts.

In his ruling, the judge accepted the banks' argument that the terms generally used for personal current accounts were not "penalties" under the terms of the contract between the bank and the customer. He held that the terms, with a few minor exceptions, were in "plain and intelligible language".

But he rejected their argument that the charges were exempt from assessment for fairness under the regulations.

The Liberal Democrat Treasury spokesman, Vince Cable, said the banks were unable to show that their charges bore any relationship to the costs they incurred. "The massive penalty charges imposed are yet another example of the major banks taking consumers for a ride. The people hit by these charges are often those least able to afford them."

Many overstretched families had found their own banks pushing them further into debt, he said.

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