Banks lose test case over charges

Bank charges for unauthorised overdrafts are subject to regulation by the Office of Fair Trading (OFT) under "unfair contract" rules, the Court of Appeal held today.

In a test case brought by the OFT and major high street banks, appeal judges upheld a High Court decision last April that the fees charged to personal current account customers are subject to regulation by the watchdog.

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

They are now expected to apply to the Law Lords for permission to appeal to the House of Lords.

The appeal judges advised that, pending a decision from the Lords and the outcome of any OFT investigation into the fairness of the charges, thousands of County Court claims launched by disgruntled customers seeking refunds should remain 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.

If upheld, the court's judgment could cost banks £2.6bn a year in lost revenue and lead to them having to make refunds of up to £1bn.

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 test case are Abbey, Barclays, Clydesdale, Halifax Bank of Scotland, HSBC, Lloyds TSB, Royal Bank of Scotland Group and Nationwide Building Society.

The Master of the Rolls, Sir Anthony Clarke, sitting with Lords Justices Waller and Lloyd, 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."

The British Bankers' Association stressed that, if today's judgment was upheld and the OFT was allowed to assess the charges for fairness, the final decision on whether a charge was fair lay with the courts, whose decisions could be appealed either way.

A Barclays spokesman said: "We are disappointed that the court has rejected the appeal but it is important to note that this is not yet a ruling on whether the charges are fair or not.

"We are set on reaching a resolution that gives clarity for consumers and banks alike and substantial progress has been made in a relatively short space of time.

"The earlier decisions from the High Court, ruling that historic terms and conditions relating to Barclays past charges and those in force in January 2008 are not unenforceable penalties, was a positive outcome and we will continue to work to show that the charges being assessed are fair.

"Barclays continues to believe that the regulations do not apply to charges of this sort, where the customer is using and paying for a service that is being offered, and that this point remains to be clarified."