Banks lose test case on penalty fees for overdrafts

BRITAIN'S biggest banks have lost a court test case about overdraft charges, paving the way for lower fees and a resolution to thousands of outstanding claims from customers.

A judge has decided the Office of Fair Trading (OFT) can rule on the fairness of the charges, which many consumers have been trying to recover through small claims or sheriff courts.

Mr Justice Andrew Smith said his judgment did not necessarily mean the charges were unfair. But the decision opens the door for the OFT to demand that banks cut their charges, unless any subsequent legal appeals are successful.

Thousands of cases currently on hold in county courts south of the Border will be frozen until 22 May, by which time the banks must decide whether they are going to appeal.

But Mike Dailly, principal solicitor at the Govan Law Centre in Glasgow, said the freeze should not apply in Scotland and that existing claims should be completed. He said: "Mr Justice Smith's decision means the unfair bank charges campaign is well and truly back in business in Scotland. We will be seeking the recall of sists (stays] in sheriff courts, as there is now no good reason claims should be frozen. The public should get their money back now."

Since the beginning of 2006, hundreds of thousands of customers have reclaimed hundreds of millions of pounds from their banks, arguing their charges were too high and unfair. The banks have consistently argued that the charges were fair and reasonable.

Yesterday's case was jointly brought by the OFT, seven high street banks and a building society to clarify the law.

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 are not unfair.

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

Doug Taylor, personal finance campaigns manager for Which?, said: "The banks should do the right thing now: concede defeat, agree with the OFT what constitutes a fair unauthorised overdraft fee, and refund their customers as soon as possible.

Every second that this issue remains unresolved is costing consumers up to £111 in overdraft charges."

The British Bankers' Association said the banks were still considering the implications of the judgment.

Q & A: BANK CHARGES
What does the judgment mean?

A: It means unauthorised overdraft charges do come under the scope of the 1999 Unfair Terms in Consumer Contracts Regulations, meaning they are regulated by the OFT and can be assessed for fairness. It does not mean that the charges are necessarily unfair.

What happens now?

There is now likely to be a second hearing, in which the court will decide whether the charges are unfair, and if so, what a fair fee would be.

Does it mean people can reclaim unauthorised overdraft charges?

No. Banks have been granted a waiver by the Financial Services Authority to put any new and ongoing claims on hold for 12 months, or until the outcome of the test case is known.

How long will it be before the outcome of the second case is known?

That case is likely to be heard later this year. But if the banks decide to appeal against yesterday's judgment, or if either side appeals against the outcome of the second hearing, the process will go on for longer.

If it is decided the level of charges is unfair, how much are banks likely to have to pay out in refunds?

It depends on what level of charges are deemed to be fair. It may be decided that the charges are not unfair or that the current level is fair, in which case they will not have to refund anything. The banks involved in the test case have so far paid out more than £550 million.

Will this lead to the end of free banking in the UK?

That's a possibility.