The Times

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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