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Banks have been given the go-ahead to stage an appeal in the House of Lords in a desperate bid to block an investigation into the legality of bank charges.

Six high street banks and Nationwide Building Society will try to reverse a ruling made last month by the Court of Appeal, which found that the Office of Fair Trading (OFT) should be allowed to assess the fairness of unauthorised overdraft charges.

Banks and building societies could lose up to £3.5 billion a year in revenue if the charges are deemed illegal, according to the OFT.

The court case, which began 2007, will now reach the highest court in the land as banks fight to prevent a bill of up to £21 billion from customers reclaiming charges going back six years.

A ruling is not now expected before the end of the year.

The decision is another major set back for tens of thousands of current account customers who have already filed claims to have bank charges reimbursed.

The Financial Services Authority issued a waiver in 2008 allowing banks to freeze ongoing claims while the court case continues.

It is estimated that banks have already refunded £1 billion of bank charges in cases settled before the waiver was put in place.

Doug Taylor, of Which?, the consumer association, said: “It is outrageous that public money is being used to drag this saga out for even longer when the banks should accept the Court of Appeal’s decision and draw a line under this issue once and for all.

“Not only are the banks prolonging the misery for their customers, many of whom are struggling to make ends meet, they are doing further damage to their already battered public image.”

Banks charge customers up to £39 for going overdrawn. Campaigners argue that the charges are disproportionate. It is estimated that an unauthorised overdraft costs banks £2.50 to administer.

The end of hefty bank charges for unauthorised overdrafts moved closer today with a ruling by senior judges that the Office of Fair Trading can decide if such charges are fair.

But the unanimous decision by the Court of Appeal - that fees charged to personal current account customers are subject to regulation by the watchdog - could also herald the end of free banking.

Consumer groups immediately called on banks to reimburse an estimated £1 billion in charges and to settle thousands of claims pending a final decision in the courts.

The banks, who could face an estimated £2.6 billion a year in lost revenue, are expected to appeal.

Although the Court of appeal judges refused them leave to go to the House of Lords, the banks are thought likely to apply directly to the law lords to bring a final appeal.

Today, Sir Anthony Clarke, Master of the Rolls, with Lords Justices Waller and Lloyd, advised that pending any final appeal, the thousands of claims from customers seeking refunds in the county courts should be put on hold.

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

The banks had argued that the charges were exempt from the Unfair Terms in Consumer Contracts Regulations 1999 because they were legitimate “remuneration for goods and services supplied” to customers in the form of overdraft facilities.

The banking industry have warned that losing the case would see the end of free banking in the UK with consumers instead having to pay a monthly fee or a fee for every transaction they carry out. The banks involved in the test case are Abbey, Barclays, Clydesdale, Halifax Bank of Scotland, HSBC, Lloyds TSB, Royal Bank of Scotland Group and Nationwide Building Society.

Sir Anthony Clarke said that the banks had argued that under a contract between bank and customer, the bank “agrees to provide its customer with an overall package and in return the customer agrees to pay charges as and when they become payable in accordance with the contractual terms.”

But the appeal judges 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.

After the judgment, GMTV’s campaigning money saving expert Martin Lewis, who was present in court, said: “This is a massive victory for bank charge reclaiming.”

The British Bankers’ Association issued a short statement saying: “These are important points of law. The courts can now go on to clarify the fairness of charges.

“Before that can happen the Office of Fair Trading has to provide the courts with its views on how charges should be assessed.”

Consumer group Which?, which has campaigned against the charges, called on the banks to start refunding customers.

Which? chief executive Peter Vicary-Smith, said: “The courts have made it clear the banks should now throw in the towel. This case has been going on too long and it’s about time they tried to regain some of their dignity and paid customers their dues. This whole saga has severely damaged the banks’ reputations. If they try to appeal in the face of such a clear decision, they will suffer further losses in the court of public opinion.”

The OFT said: “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.

“We are now analysing the implications of the judgment for our ongoing investigation.

“The OFT has already written to the banks with its provisional view on the fairness of the terms, setting out its concerns that they may be unfair. We expect to reach a final decision on fairness later this year.”

Andrew Hagger, of Moneynet.co.uk, said: “This latest ruling is a small but positive step on the long and painful road for those holding out for a refund of their charges.

“Unfortunately, while the OFT carries out further investigations, the teetering piles of claims will continue to gather dust in bank head offices rather than provide the windfalls that so many consumers desperately need.”

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The Office of Fair Trading has been given the green light to establish once and for all whether bank charges are unfair.

Thousands of savers came a step closer to finding out if they will be able to reclaim up to a billion pounds of unauthorised overdraft fees, after Britain's biggest banks lost an appeal today at the High Court.

The ruling paves the way for an investigation that could cost the banks up to £2.6 billion in lost revenue a year and lead to them having to make refunds of up to £1 billion.

After a 13 month long battle, consumer groups have urged the banks to admit defeat. The banks, however, could appeal again, this time to the House of Lords, delaying an investigation and holding up the cases of thousands of claimants.

Peter Vicary-Smith, chief executive of Which?, the consumer organisation, said: "The courts have made it clear the banks should now throw in the towel. This case has been going on too long and it’s about time they tried to regain some of their dignity and paid customers their dues.

"This whole saga has severely damaged the banks’ reputations. If they try to appeal in the face of such a clear decision, they will suffer further losses in the court of public opinion.”

The latest ruling gives the OFT the green light to decide if bank overdraft charges are fair or not. It follows a test case last year between the OFT and eight current account providers concerning fees for unauthorised overdrafts and bounced cheques.

In April, the OFT won the first stage after the High Court rejected the banks’ claim overdraft charges fell outside the scope of the 1999 Unfair Terms in Consumer Contracts regulations. This prompted the banks to ask the Court of Appeal to overturn that decision.

Today, the three Appeal Court judges rejected this and said the issues should now be resolved by an OFT assessment of fairness.

Consumer groups fear that, as the banks struggle with their own huge financial problems, they may be unwilling to accept the judgment.

The banks are concerned that if the OFT is allowed to proceed, it could cap the fee for bouncing cheques or exceeding overdraft limits at a far lower rate than the currently charged. This will be similar to the approach already taken for credit card late payment fees, which resulted in charges being slashed from up to £35 to £12.

Many current account providers have already adjusted their charging structure and reduced their fees, ahead of a decision, however the OFT has not given any indication of how low a cap could be set.

The regulator could also force banks to refund the difference between the charges they imposed and a new acceptable rate of penalties.

Analysts have warned that this could bring an end to free banking, with consumers instead having to pay a monthly fee or a fee for each transaction they make.

Since the beginning of 2006 hundreds of thousands of bank customers have tried to reclaim their charges on the grounds that they were too high and unfair. UK banks have paid an estimated £784 million in out-of-court settlements to customers who have reclaimed up to six years' worth of overdraft charges.

The Financial Services Authority has given the banks permission to suspend refunds until the test case is completed. Thousands more cases launched in the county courts or with the Financial Ombudsman Service will also remain on hold.

The banks have 28 days to decide if they will make a further appeal.

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NatWest staff are urging customers to reclaim bank charges while its lawyers continue to defend the controversial penalties, The Times has learnt.

Consumer groups have branded the bank “hypocritical” after an investigation by Times Money found staff routinely informing over-indebted consumers to write to their current account provider to demand charges are refunded.

The Royal Bank of Scotland (RBS), the parent bank of NatWest which is 70 per cent owned by the taxpayer, is one of six high street banks, along with Nationwide building society, fighting the Office of Fair Trading (OFT) in the Court of Appeal to block an investigation into the fairness of bank charges.

High street banks hit customers with charges of up to £39 for going into the red by just a few pence. The banks make billions of pounds a year from the penalties, which consumer groups argue are disproportionate and can exacerbate debt problems.

The Financial Services Authority has extended a waiver allowing banks to freeze claims for refunds while the court case rumbles on.

An investigation by Times Money into the NatWest/RBS MoneySense campaign, which offers free financial guidance in branch to its own customers and those of other banks, found that advisers encouraged consumers to reclaim bank charges.

Times Money reporters visited four NatWest branches across London posing as customers from other banks looking for financial advice. In three cases, the “impartial” MoneySense advisors recommended reclaiming overdraft charges. In only one branch did the advisor refuse to recommend such an approach.

One adviser, a staff member of NatWest, told an undercover reporter that she had applied for the refunds and had also written letters for her friends and family. She said that template letters could be downloaded from the internet.

Phil Jones, personal finance campaign at Which?, the consumer association, said: “It is hypocritical and bizarre that while RBS is levying these unfair charges on customers its own advisers are encouraging customers of other banks to reclaim them. RBS should throw in the towel on the current court case along with the other high street banks and refund all the customers who have been hit by these unfair charges in the past.”

Last year the banks appealled against a decision in the High Court to allow the OFT to investigate the fairness of charges levied by banks and building societies.

The Court of Appeal has not yet come to a verdict.

A NatWest spokeswoman refuted the allegations but declined to comment further.

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Thousands of savers who are pursuing their banks over unfair overdraft charges have been told they will have wait at least six months more to learn if they will receive compensation.

The Financial Services Authority (FSA) announced today that it is extending the waiver that allows banks not to pay out on claims.

The waiver was introduced in July 2007 when the Office of Fair Trading (OFT) started a court action to prove that high charges for unauthorised borrowing are unfair. It was due to expire next Monday, but the court case is far from complete and the FSA has said that it will allow banks to put claims on hold for a further six months.

Dan Waters, director of Retail Policy and Conduct Risk at the FSA, said: “Our objectives continue to be certainty over this complex issue, and a fair and consistent resolution of consumer complaints about unauthorised overdraft charges. The FSA has reviewed the prevailing circumstances and has decided to offer firms an extension to the waiver, to run for up to six months.”

While the waiver is in place the Financial Ombudsman Service has agreed not to proceed with complaints. Cases in the county courts have also been put on hold. The FSA can revoke the waiver at any time if the situation changes.

The waiver covers almost all banks - 98 per cent. You can view the banks and building societies that qualify here .

It relates to a legal challenge by the OFT against eight institutions responsible for the majority of the UK’s current accounts, including Barclays, HSBC, Lloyds TSB and the Royal Bank of Scotland.

The OFT is seeking a court ruling that unauthorised overdraft charges are unlawful under consumer regulations introduced in 1999. It estimates that the banks earn £2.6 billion a year from the charges.

In April, the OFT won the first stage after the High Court rejected the banks’ claim that the regulations did not apply. This prompted the banks to ask the Court of Appeal to overturn that decision. The Court of Appeal’s judgment has yet to be handed down.

Martin Lewis, of MoneySavingExpert.com, a financial website, said: "This means people are still sitting on their hands, unable to try to reclaim money which was taken from their accounts without their permission, while the banks continue to make £100s of millions in charges and take bailouts from the government.

"Paying out to consumers now could free up cash for spending to boost the economy, but how long are people expected to wait? A further year? Until it goes all the way to the European Court? With the economic slowdown, the credit crunch, inflation and house prices falling, this hold adds to the woes."

However, some consumer groups have welcomed the extension of the waiver because it means that claims can be made going back for a longer period.

The rules state that you are able to make a claim for charges incurred over the past six years. As long as the waiver is in place, consumers can claim charges dating back to July 2001.

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RBS plans to "proactively" refund overdraft fees if it loses the ongoing test case over bank charges.

The bank, which also owns NatWest, confirmed today that it was making “careful contingency plans” after a document referring to the measures was leaked to the BBC.

According to the document, a team is "preparing systems and processes to proactively refund charges to the group's customer base" and "all customer accounts that are due a refund will be calculated as accurately as possible".

The bank is one of eight lenders fighting a High Court test case with the Office of Fair Trading (OFT) to decide the legality of unauthorised overdraft fees, which cost consumers billions of pounds a year. The banks appealed after losing the first round in April, when the judge ruled that the OFT could apply consumer contract regulations to decide if the charges are fair or not.

The case – which the banks could pursue to the House of Lords – has left up to one million savers who are pursuing their banks for refunds in limbo, after the Financial Services Authority (FSA) authorised an extendable waiver that allows banks not to pay out on claims until next January. RBS said today that the conditions of the waiver were behind the contingency plans leaked today.

A spokesman for RBS said: "As a condition of the waiver, RBS and the other banks agreed with the FSA in July 2007 and again in 2008, to deal 'efficiently and swiftly' with customer complaints on conclusion of the test case, irrespective of its outcome. This included 'making preparations for dealing with relevant charges complaints when this direction ends'.

"For an organisation of our size and our different brands, complying with these requirements demands careful contingency planning and this document merely confirms that RBS is taking its obligations in this respect seriously as it has done throughout the whole test case process. This workstream has absolutely no bearing on how we see the outcome of the test case."

Campaigners have criticised the banks for prolonging the legal process. Phil Jones, of Which?, the campaign group, said: "The banks have already lost the test case in the court of public opinion. Instead of stringing out the legal action, perhaps even to the House of Lords, the banks should admit defeat and repay their customers what they have unfairly charged. Only by doing this can they start to rebuild the trust they have lost amongst the public."

An verdict on the banks' appeal is expected before the end of the year. However, final resolution of the case is unlikely before the end of next year. As long as the waiver is in place, consumers can claim for refunds on charges dating back to July 2001.

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Thousands of customers only discovered the mistake when they saw their card or bank account and found they had been charged double for their items.

They have been warned they not get their money bank until next week, meaning customers could be in debt and facing bank charges.

Only those who shopped at the store last Friday were charged double.

A spokeswoman said the error was due to a "system issue" but refused to say why the firm had not made the mistake public.

She said: "We'd like to apologise to any customer double-charged in one of our stores on Friday, October 24.

"We are a large company and from time to time, things go wrong.

"At this stage it is impossible to state the exact figure taken from customers' accounts but it is likely that this will be a total of several millions of pounds. We have rectified the error."

More than 350,000 Brits shop at Argos every day.

One customer who was affected, David Carter, 30, bought a camera worth £44.98 and a £19.99 toy at the Harlow Retail Park in Essex.

He told The Daily Mirror: "Luckily I had not spent a huge amount. But you worry about anyone who bought a bed or a TV.

"To keep this information from customers is incredible, especially when we're all struggling with bills and the credit crunch at the moment."

Last week it was announced sales at Argos have declined by historic amounts due to the slowdown in consumer spending.

Argos-to-Homebase retailer Home Retail Group reported a 19 per cent drop in pre-tax profit over the first half of its financial year.

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High street banks will today begin the latest round of a legal fight that threatens an overhaul of their retail charges at a cost of billions of pounds.

Eight lenders responsible for the majority of the UK’s current accounts, including Barclays, HSBC, Lloyds TSB and the Royal Bank of Scotland, face a challenge by the Office of Fair Trading (OFT), the consumer watchdog, to their practice of imposing fees for processing transactions when customers have insufficient funds.

The OFT, as part of a wider review of current accounts, is seeking a court ruling that the unauthorised overdraft charges are unlawful under consumer regulations introduced in 1999. It estimates that the banks earn £2.6 billion a year from the charges.

Today’s hearing is the latest stage in what is set to be a costly and protracted legal battle. In April, the OFT won the first stage after the High Court rejected the banks’ claim that the regulations did not apply. The banks will now ask the Court of Appeal to overturn that decision.

Consumers face a long wait before they will know if they are entitled to a refund as the courts will not consider the fairness of the charges until the preliminary issues are resolved. Around 50,000 claims in the county courts have been stayed pending the outcome.

Although the furore over the charges has been overshadowed by the banks’ recent financial troubles, the stakes in the case remain high. The banks had paid out almost £1 billion before a freeze on claims was imposed and they stand to lose billions more if the OFT’s action succeeds.

If the court sides with the watchdog, it could force the banks to limit or scrap the charges altogether — that, some predict, will lead to an end to free current accounts.

Speaking on behalf of the lenders, the British Bankers’ Association said the banks would continue to fight for their right to impose the charges. “The banks are appealing on this issue as they continue to believe that the fairness test of the [regulations] does not apply to these type of charges.”

The banks have been given permission by the Financial Services Authority, the financial watchdog, to continue applying the charges until the case is resolved.

In July, the OFT published a study into the market for current accounts, which expressed concern that many customers were unaware that the charges existed. It found that 12.6 million accounts — 23 per cent of the active total — had been subjected to such charges, while more than 1 million customers had amassed charges of £500 or more.

The charges increased an average of 17 per cent between 2003 and 2007, the study found.

In August, the watchdog wrote to the banks to open discussions that it intends will run parallel to the court case. Yesterday it said: “Alongside of [the test case], we continue to progress our investigation as quickly as possible and are in ongoing discussion with the banks about our provisional view on the issue of fairness.”

The lenders involved in the case are: Abbey, Barclays, Clydesdale, HBOS, HSBC, Lloyds TSB, Nationwide and the Royal Bank of Scotland.

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Bank charges came under renewed scrutiny yesterday after a student claimed she had been charged more than £800 after going just 8p overdrawn.

Lloyds TSB has threatened Laura Gibson, 20, of Cheltenham, with legal action to recover the debt, which began when she made a £60 purchase in September.

The purchase put Ms Gibson 8p in the red which immediately triggered a fee of £65. As Ms Gibson did not clear the overdraft she was charged a further £30 in October, £60 in December and £78 in January. Then in May, Lloyds TSB increased its unauthorised overdraft charges to a flat rate of up to £20 a day.

She said: "This whole episode has been an absolute nightmare. I've now paid more than £300 in charges but still they want more. I've stopped using the account and the way I've been treated is disgraceful."

Ms Gibson, who is enrolled to start A-Levels in September, says the stress of the charges contributed to a nervous breakdown.

"Lloyds TSB have been harassing me by telephone and by mail, putting pressure on me to pay this money back. I feel that it is morally irresponsible that the bank can charge people such ridiculous amounts of money especially when some of the charges amount to more than my income each week."

A spokesman for Lloyds TSB said: "The charges that Ms Gibson has incurred are not for a one-off unplanned overdraft position of eight pence, they relate to an unplanned overdraft of varying amounts dating back to September 2007.

"In situations where there are extenuating circumstances, such as illness, that may affect a customer's ability to manage their finances, we can consider waiving part or all of the charges that they have incurred. We will be contacting Ms Gibson again to discuss her personal circumstances."

Watchdog attacks the bank’s £165 charge for falling into the red

Lloyds TSB was named last week as the worst offender for punishing customers who fall briefly into the red.

Those in the Lloyds TSB Classic Plus account who exceed their agreed overdraft limit by £50 for two weeks are charged £165, finance website Moneynet.co.uk reports. This compares with HSBC’s £25.10 charge and £30.52 by Barclays. Alliance & Leicester, second after Lloyds, charges £95.

A damning report by the Office of Fair Trading (OFT) last week said that banks rake in about £8.3 billion from current account charges. The charges are equivalent to £152 per account and represent greater income than savings and credit cards combined.

The report also accuses banks of being opaque about how they derive revenue from accounts, confusing customers and making it difficult to compare deals.

John Fingleton, OFT chief executive, said: “Personal current accounts are a vital gateway to effective participation in the economy. But this market is not serving consumers well.”

Meanwhile, the OFT has taken banks to court over the legality of overdraft charges, although banks are appealing against the court’s verdict that they come within the OFT’s remit. A second hearing on whether the charges are unfair and what a fair charge would be has been delayed until the appeal is heard.

The OFT was particularly critical of lenders that charge a high interest on overdrafts, but offer negligible or no interest on current accounts. Fingleton said these were “a type of stealth payment”.

The report says banks make almost twice as much from paying poor in credit rates to customers than they make in levying charges. Income generated from not paying higher rates of interest is estimated at £4.6 billion, while charges associated with insufficient funds are £2.6 billion, it says.

First Direct, Barclays and the Co-op do not pay interest on current accounts, while Royal Bank of Scotland and NatWest pay only 0.1%.

Michelle Slade, analyst at Moneyfacts.co.uk, the comparison site, said: “The fact that these institutions pay no or little credit interest is disgraceful. With inflation as high as it is, anyone with money with these banks is effectively losing money.”

The best interest rate is Alliance & Leicester’s Premier Direct account. It pays 8.19% on balances up to £2,500 but 0.1% on sums above this. At least £500 has to be paid into the account each month.

Cahoot pays 3.69%, the highest in-credit interest rate without any catches. If you want a chequebook with the account, the rate is 3.59%.

Bank charges for those regularly in the red rose by 17% between 2003 and 2007, the OFT reported. About 12.6 million accounts, or 23% of UK accounts, incurred at least one unauthorised overdraft charge in 2006. Such people should choose an account with a low overdraft rate. Norwich & Peterborough building society offers 0% on authorised overdrafts for six months, then charges 7.74%.

Most bank customers are unsure how bank charges work. Moneyexpert, a comparison website, said 71% of customers described bank charges as unclear. Only 17% understood the charges.

Moneyexpert said: “One logical conclusion of the OFT report would be to remove the less visible fees imposed by banks and replace them with simple monthly charges similar to the existing ‘packaged account’ model.”

However, it is feared that a crackdown on charges would result in the end of “free” banking. A spokesman said: “If and when the decision is made to cap the unauthorised overdraft fees and unpaid charges it is inevitable that we will move towards paying monthly or annual fees for our personal banking.”

Angela Knight, chief executive of the British Bankers Association, said: “Yes, you can incur charges if you do things without making arrangements first, but do you really want to pay for ATM use, pay for statements, pay for direct debits in this country?

“Surely people don’t. The Office of Fair Trading unfortunately does need to perhaps look at that balance as far as its report is concerned.”

Lloyds TSB dismissed the Moneynet study.

A spokesman said: “The most common scenario for our customers is to be overdrawn for only one day, in which case they would be better off with us than with many of our competitors.”

The OFT study began in April last year.

In 2001 the Cruickshank Report said that savers were not adequately informed and found financial products difficult to compare.

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