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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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This is the moment Britain's banks have been dreading. For several years now, almost every current account provider in the land has been quietly settling claims for compensation made by customers furious about charges that bore no relation to the cost incurred when someone exceeded their overdraft limit or bounced a cheque.

In public, the banks have presented a united front, arguing they were doing nothing wrong in charging £25 or more each time customers bust their limits, even by just a few pence. Their arguments were undermined by their own behaviour – every time a customer threatened to take them to court over such charges, compensation was coughed up swiftly. Anything to avoid a court case that would set a precedent by which all compensation claims could be judged.

Unfortunately for bank bosses, however, the day of reckoning has arrived. The High Court could not have been clearer yesterday: bank charges most definitely are covered by laws governing unfair consumer contracts and, as such, the banks are acting illegally.

By all the laws of natural justice, yesterday's ruling should be an end to this sorry controversy. Not only should those customers who have already complained about charges get their refunds immediately, but banks should be forced to scour their records for all those who haven't claimed and reimburse them.

If only life were that simple. Leading banks are now considering an appeal and the Office of Fair Trading (OFT) has, in any case, still to work out what a fair charge for unauthorised borrowing would be. Bank charge victims won't be able to work out what they are owed until this figure has been set.

The real pity of this is that we never needed a court case in the first place. The OFT has long known exactly what it costs to process unauthorised borrowing cases. Last summer, it told the credit card industry that any penalty fee above £12 would almost certainly be considered illegal.

The watchdog was poised to make an identical ruling in the banking sector. But at the last minute it lost its nerve, following a PR campaign from the banks.

The Financial Services Authority also granted the banks an unprecedented right to postpone consideration of all complaints about borrowing charges, pending the High Court's decision. Now we have that decision, the FSA ought to lift that waiver.

In the meantime, however, the important message to bank customers from yesterday's ruling is that the law is on their side. Stake your claim to compensation as soon as possible – it may take some time, but you will eventually get the money you're owed.

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Campaigners this week urged consumers to continue reclaiming "unfair" bank penalty charges after the Office of Fair Trading won the first round of its legal battle with Britain's big high street institutions.

On Thursday, a judge decided that the OFT can rule on the fairness of these charges - in particular, fees for unauthorised overdrafts and bounced cheques.

There will now be one or more high court hearings to discuss whether the charges are unfair and, if so, what a fair charge should be. But it could be a complicated and lengthy process, and the banks may well appeal.

While many thousands of people have already succeeded in getting payouts from their banks, things came to a halt last year when it was agreed that decisions on all customer claims would be put on hold until the outcome of the case. As a result, hundreds of thousands remain with their bank, the financial ombudsman or the courts, while the law is clarified.

The Financial Services Authority says that for now the "waiver" it granted, allowing banks to put off dealing with claims, will continue. However, it adds that it will be assessing "whether the waiver remains appropriate" going forward.

Doug Taylor at consumer body Which? says the banks have the option to appeal this week's decision. If this happens, the FSA waiver is likely to remain in place during the appeals process. "The FSA must now drop its waiver so that the thousands of cases pending in the county courts and at the Financial Ombudsman Service can be processed," he adds.

Many campaigners say customers who have paid charges should carry on downloading template letters (from guardian.co.uk/money, among other sites) and writing to their banks to make sure their complaint is in the system. "It's crucial to start a reclaim now, as you can only go back six years (five in Scotland), and delaying may mean you lose the ability to get old charges back," said Martin Lewis at consumer revenge website MoneySavingExpert.com. He says more than 4.5m template letters have already been downloaded.

David Kuo at personal finance website Fool.co.uk, says it is "cruel" to make customers wait. He adds: "Customers who have been unfairly penalised should continue to reclaim unfair fees. There is a six-year limit for reclaiming the charges, though the clock stops the moment you lodge your complaint with the court. Customers should not delay."

As to how much people might get back, that will depend on the final outcome. Last year, many customers were winning payouts of several thousand pounds. In April 2007, NatWest paid £35,987 to a Norfolk businessman.

If the banks decide not to appeal, their terms and conditions will be assessed for fairness. Where current terms are unfair, the OFT will agree a regime with the banks - effectively placing a cap on the level of overdraft fees.

Billions of pounds are at stake. According to the OFT, the banks collectively receive up to £3.5bn in unauthorised overdraft fees each year - the equivalent of about £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.

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The long-running controversy over bank charges could come a step closer to being resolved this week after it was announced that the judge hearing the test case would be handing down his judgement on Thursday.

The case, which began in January, saw the Office of Fair Trading (OFT) take on eight banks and building societies over the fees levied when a current account goes over its agreed overdraft limit, or a cheque or direct debit is bounced.

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.

The OFT claims the charges are illegal under the Unfair Terms in Consumer Contracts Regulation 1999.

Should it win the case it is likely to force current account providers to cut fees, and the banks could be made to return millions of pounds to customers.

Earlier this year HSBC, one of the banks involved in the case, admitted it had already repaid £11m of fees and could face claims for a further £300m.

Mr Justice Andrew Smith, who heard the case in January this year, listened to 14 days of evidence put forward by the OFT and the banks, who represent 90% of the current account market.

The consumer group Which? outlined three of the possible outcomes for the test case:

· An outright win for the OFT: The court could rule that all terms and conditions (T&Cs) for the test case banks over the past six years can be assessed for fairness

· An outright win for the banks: The court could rule that none of the T&Cs used by any of the test case banks over the past six years can be assessed for fairness

· Something in between: The court might decide that some T&Cs are subject to fairness assessment, while others are not. Distinctions could be drawn on the basis of the type of charge, the bank in question, or the version of T&Cs in question

In each scenario it said it would then be necessary to assess whether the court's ruling also applied to banks not involved in the case.

A straightforward win for either side would make this easier, but is likely to lead to an appeal by the losing side, which might not be heard until 2009.

The OFT said it would be reading the judgement on Thursday and considering it carefully before making a statement.

The fees became a subject for consumer rebellion last year after the OFT ruled that similar fees for late and unpaid credit card repayments were unlawful and consumer groups started to encourage customers to claim refunds.

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.

The Financial Services Authority had allowed account providers to put reclaim letters on hold until the test case was resolved.

This may be extended until the outcome of any appeal, so it could be another year before consumers find out if they are entitled to refunds.

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The major high street banks have so far paid out more than £550m to customers who complained about unauthorised overdraft charges.

The payouts, which total £559m, were revealed in the annual results of the majority of the banks involved in the high court test case over the issue of whether the charges are fair.

But the actual total is set to be higher, however, as both Abbey and Nationwide building society declined to disclose how much they had refunded.

The HBOS group, which includes Halifax, has faced the biggest payout to customers, refunding a total of £122m.

Royal Bank of Scotland Group, which includes NatWest, has paid out £119m so far, while Barclays has paid out £116m and HSBC £115m.

Lloyds TSB refunded £76m to customers before the test case began, and Clydesdale and Yorkshire banks said claims and costs, as well as provisions for future administrative costs relating to the issue, totalled £11m.

The banks are currently awaiting the judgment from a test case which could pave the way for a ruling on how much they can charge people who go overdrawn without authorisation or breach their agreed limit.

The case was bought jointly by the seven banks, Nationwide and the Office of Fair Trading after consumers began to reclaim millions of pounds through the courts.

It concerns whether unauthorised overdraft charges come under the scope of the 1999 unfair terms in consumer contracts regulations, which the banks and building society say do not.

If the judge rules that they do, the court will decide at a separate hearing whether the charges are unfair and give guidance on what a fair fee should be.

Worst-case scenario

The banks have been given permission to put any new or ongoing refund claims on hold until the outcome of the test case is known.

HSBC said yesterday that in the worst-case scenario total refunds could reach £303m if it loses the court case.

The other banks involved declined to predict the total liability they would face, but if like HSBC total payouts would be more than double the amount so far refunded, banks could collectively face a bill of more than £1.1bn.

Banks are thought to make between £2bn and £3.5bn a year in fees charged when customers go into unauthorised overdraft.

These can be as high as £39, but campaigners claim the actual cost to banks is as little as £2.50.

Commercial lawyers have warned that, if the charges are scrapped or drastically reduced, it will mean an end to free banking and all customers will have to pay a monthly current account fee.

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