The Guardian

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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Royal Bank of Scotland kicked off the much-anticipated case over bank charges yesterday, partly blaming the UK's consumer watchdog for "the flood of claims ... deluging the courts".

In a room of more than 50 lawyers at the International Dispute Resolution Centre, Laurence Rabinowitz QC, opened the proceedings for RBS with a dig at the Office of Fair Trading (OFT).

Pointing to the consumer revolt against penalty charges that gathered pace last year, Rabinowitz told the hearing that the flood of claims in county courts and before the Financial Ombudsman Service were in part due to "ill-judged" comments by the OFT after its ruling on credit card charges in 2006.

The OFT had said credit card providers were charging unfair fees for late and missed payments, and compared them to charges imposed on current accounts such as those for unauthorised overdrafts.

Rabinowitz said these comments were "unfortunate" because they came before the consumer watchdog started its investigation into the fairness of unauthorised overdraft charges. He said: "A hornet's nest had been disturbed, and something had to be done."

In the rush to reclaim charges, millions of people downloaded complaint letters from the internet and local courts were clogged up with customers demanding refunds.

In July last year, seven banks, one building society and the OFT agreed to proceed with a test case that could determine how much banks can charge customers for unauthorised overdrafts or bounced cheques. The consequences of the case, argued Rabinowitz, "will be eagerly awaited across the country".

The OFT is asking to be allowed to challenge the banks' penalty charges under the Unfair Terms in Consumer Contracts Regulation of 1999. It claims the charges are unfair under this law.

High street banks today defended their practice of charging for unauthorised overdrafts and blamed the Office of Fair Trading for the "torrent" of refund claims received from dissatisfied customers.

On the first day of a test case over the legality of the fees, the banks argued that the rules on consumer contract fairness do not apply to the charges they impose for unauthorised overdrafts.

The fees, often in excess of £30, are charged when a customer goes over an agreed overdraft limit, or has a cheque or direct debit bounced.

The banks are represented by more than 50 lawyers, and each bank's team will set out its case in turn during the hearing, which could last several weeks.

Laurence Rabinowitz QC, a lawyer for Royal Bank of Scotland, was the first to stand up.

He told Mr Justice Andrew Smith that the "flood of claims currently engulfing the court system" was partly a result of "ill-judged comments" made by the OFT.

In a ruling in 2006 that said credit card providers were charging illegally high fees for missed and late payments, the OFT said the principles were "analogous to other default charges in consumer contracts, for example in agreements for bank overdrafts".

The comments were seized upon by campaigners who urged consumers to contact their current account provider and tell them they believed the fees were unlawful.

Millions of template letters were downloaded from websites, including guardian.co.uk, and with the banks refusing to contest cases customers were able to reclaim their money - sometimes thousands of pounds worth of fees.

Rabinowitz said the comment was "unfortunate" because it was made before the OFT had even begun its ongoing investigation into current account overdraft charges.

It became obvious that, "a hornet's nest having been stirred", the matter should go to court for a decision on the issues, he added.

The case, in the high court's commercial division, has been jointly brought by the OFT and seven leading retail banks and the Nationwide building society.

It is being held in the International Dispute Resolution Centre in London, because the huge number of lawyers involved made a high court hearing impossible.

As the legal teams filed in they were serenaded by the folk group Oystar whose song, I Fought the Lloyds, describes the singer's success in reclaiming charges from his bank.

The song, which has been championed by websites including the Moneysavingexpert.com site, made it to number 25 in the charts at the weekend

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Consumers waiting for the test case over the legality of bank overdraft charges to start will have to wait a little longer, after it emerged the hearing would not be able to start tomorrow as planned.

The case has been postponed because the judge hearing it has been detained on another case.

The Office of Fair Trading (OFT), which is taking the case against seven banks and one building society, said it hoped proceedings would begin before the end of the week.

The case is designed to determine the legality of charges imposed by current account providers when a customer exceeds his or her agreed overdraft limit or pays a cheque or direct debit that the bank later bounces.

The OFT believes the law on contracts means banks cannot charge fees in excess of the cost of dealing with an unauthorised overdraft, a position the banks dispute.

When it finally begins, the case is expected to last eight to 10 days with the judge expected to make a ruling by Easter.

Campaigners, who have lobbied banks to reduce penalty charges, had been expected to appear outside the International Dispute Resolution Centre in London tomorrow, where the hearing is being held.

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Britain's main consumer watchdog and the big high-street banks will lock horns this week in a court case that could change the face of UK banking.

The test case beginning on Wednesday aims to resolve the uncertainty over bank penalty charges, which sparked a huge consumer rebellion last year.

If the Office of Fair Trading (OFT) wins, billions of pounds' worth of charges for unauthorised overdrafts and bounced cheques could be refunded to account holders. But, some commentators say, it could also mean the end of free banking. If the banks come out on top, millions of people will continue to be hit with excessive and unfair fees, according to the consumer organisation Which?

The case is being heard at London's International Dispute Resolution Centre rather than the high court, and is expected to last eight to 10 days, with the judge's decision likely in April or May. "We believe we have a strong case," says the OFT.

But this may be only the first stage in a long saga. The banks will almost certainly appeal if the judge finds against them, and the OFT may well do the same if it loses. The case could be taken to the House of Lords or even to Europe.

A consumer revolt over bank charges gathered pace rapidly last year, with millions of people downloading complaint letters to send to their banks, local courts getting clogged with customers demanding refunds, and some institutions warning that their profits would be dented as a result of people flocking to reclaim fees.

The charges have long been a cause of annoyance. One of the most common complaints is that they do not reflect the actual costs incurred by the banks. The OFT has been trying to get to the bottom of claims that the real cost to banks of bouncing cheques, standing orders and direct debits may be less than £2, not the £25 to £39 that is typically charged.

The banks argue that the fees are legal and a legitimate part of banking services.

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.

Now the two opposing sides in the debate have agreed to embark on a test case designed to end the ambiguity and determine once and for all whether or not the charges are unfair. The OFT has entered into an agreement with eight leading current account providers - Abbey, Barclays, Clydesdale, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland/NatWest and Nationwide - "to facilitate an orderly and timely resolution of the legal issues".

It says this first stage of the legal battle is about a point of law relating to the Unfair Terms in Consumer Contracts Regulations 1999. "The banks do not accept that the legal test of unfairness set out in unfair- contract-terms legislation applies to the charges. The OFT believes that it does and is seeking to establish this legal principle clearly in the high court."

In the meantime, the OFT has been collecting information from the banks to allow it to assess whether the levels of their charges are unfair. If the OFT decides the charges are unfair but cannot get the banks to agree a fair fee, it will expand the court case to seek a ruling on this.

Many hundreds of thousands of people have been demanding refunds of charges going back six years on the grounds that they bear no relation to the bank's costs and are illegal. In many cases, the banks have been settling up with customers without too much fuss. In April last year, NatWest decided to pay a record £35,987 to one customer, a Norfolk businessman, rather than face him in court, where it would have had to justify its fees. But there have also been cases where county court judges have ruled in favour of the banks, which have muddied the waters.

It was agreed last year that decisions on all customer claims for refunds would be put on hold until the outcome of the case. As a result, thousands of people's claims are on hold with their bank, the financial ombudsman or the courts, while the law is clarified. However, campaigners have urged people to continue lodging their complaints with the banks.

The OFT has dismissed suggestions that current account holders could face charges averaging £300 a year if banks are forced to give up the controversial fees.

The British Bankers' Association has claimed that free banking could disappear if the courts ruled in the OFT's favour, warning that its members "could follow patterns abroad where banks charge for transactions such as ATM usage, direct debits and standing orders, in addition to an annual fee".

The banks stress that they need some way of controlling customers who go into the red but privately admit they should have treated customers going a few pounds overdrawn better, and that they failed to see the consumer revolt coming.

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A test case that starts in the High Court tomorrow could spell the end of free banking in the UK as early as next year. The Office of Fair Trading is to take on eight of the high street banks, including HSBC, Lloyds TSB and Abbey, and one building society, Nationwide, to determine if the fees they charge for overdrafts are unfair.

The banks collectively receive up to £3.5bn in unauthorised overdraft fees - charged when borrowing exceeds an agreed amount - each year, according to the OFT.

A number of banks have already indicated that if the OFT is successful they will look to recoup costs elsewhere, possibly by introducing annual account management fees.

'The test case this month is key for banks and consumers,' said Julian Skan of management consultant Accenture, which last week published a report into bank charges. 'If the banks lose, this risks increased charges elsewhere for people who remain in credit and possibly the withdrawal of banking services from unprofitable poorer customers.'

Consumer groups such as Which? are backing the OFT in the court case. 'We believe that the fees do not reflect the actual costs incurred by the banks, and are therefore unfair and unenforceable,' said Which? personal finance campaigner Doug Taylor.

'Consumers who want to reclaim bank charges should continue to lodge their complaints with the banks until this case is resolved.'

The initial hearing will last for about eight days, with the judge's decision expected in April. However, appeals by either the banks or the OFT are likely to extend the case until the end of the year.

'While some borrowers may see reductions while they await the result of the test case, I suspect many more will face higher fees if they slip into the red; but more worrying is the lack of transparency, comparability and the wide variation in fees,' said Moneyfacts' Lisa Taylor.

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