Bank charges challenge gets go ahead

Charges levied by banks for unauthorised overdrafts are subject to regulation by the Office of Fair Trading under "unfair contract" rules, the High Court ruled today.

The decision paves the way for a further hearing in which the court will decide whether the charges are unfair and, if so, what a fair charge should be.

Mr Justice Andrew Smith stressed that his decision today did not mean that the terms imposed on customers by the banks were necessarily to be regarded as unfair under the 1999 Unfair Terms in Consumer Contracts Regulations (UTCCR), or that they were not binding on consumers.

The case was jointly brought by the OFT and seven high street banks and a building society to clarify the law after consumers began to reclaim millions of pounds of charges through the courts.

The judge accepted the banks' argument that the terms generally used for personal current accounts were not unenforceable on the grounds of being "penal".

And 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 banks contend that the charges are fees for a service, namely setting up an overdraft, and they are not unfair.

The charges are incurred when bank customers take out an unauthorised overdraft or breach their authorised limit.

Charges can also be levied if customers make a payment but have insufficient funds in their account to cover it or if banks stop a payment because the account holder does not have enough money.

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

The fees can be as much as £35 for a single bounced payment, although campaigners claim the cost to the banks could be as little as £2.50.

Annual results for the major high street banks show they have so far paid out more than £559m in refunds to customers who complained about unauthorised overdraft charges.

But the actual total will be higher as both Abbey and Nationwide Building Society declined to disclose how much they had refunded.

Banks were given permission to put any new or ongoing claims on hold until the outcome of the test case.

This "stay" is expected to remain in place after today's judgment as the final outcome of the case will not be known until after the second hearing.

If the court eventually decides the charges are too high, it is likely to open the floodgates for claims at a time when banks are already under pressure from the credit crunch.

HSBC has said 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 if they lost the case, but if like HSBC total payouts would be more than double what they have refunded so far, banks could collectively face a bill of more than £1.1bn from the issue.

Members of the industry have also warned that losing the case is likely to lead to 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 case are Abbey, Barclays, Clydesdale, Halifax Bank of Scotland, HSBC, Lloyds TSB, Royal Bank of Scotland Group and the Nationwide.