Page last updated at 00:00 GMT, Tuesday, 22 December 2009

Regulator decides on bank overdraft charges test case

Supreme Court judgement
The Supreme Court ruled unanimously in favour of the banks

The Office of Fair Trading (OFT) will say later if it is going to continue its test case against banks over the fairness of their overdraft charges.

It follows the banks' successful appeal on the issue to the Supreme Court.

It ruled last month that the OFT could not use a part of the unfair consumer contract regulations to decide if bank charges are fair.

At stake is the ability of banks to levy charges amounting to £2.6bn each year on their overdrawn customers.

The announcement, the OFT's first detailed response to the Supreme Court judgement, is expected at 0700 GMT.

Martin Lewis, whose website has played a leading role in the campaign against bank charges, urged the OFT to continue pursuing legal action.

"We know the OFT thinks charges are unfair, because it provisionally said so," said Mr Lewis.

"If the OFT pulls out, it'll be a terrible day for justice.

"The banks' deep pockets, filled to a great extent with taxpayers' money, have priced out many consumers from fighting unjust charges," he added.

Supreme Court ruling

The banks and the OFT first agreed to stage a legal test case in July 2007, to decide if the OFT had the powers to rule on the fairness of bank charges.

If the OFT is not going to act as the consumer champion, who is?
Marc Gander, CAG

A consumer campaign on the issue had led to hundreds of thousands of complaints which threatened to swamp the UK legal system.

But after the High Court and Appeal Court sided with the OFT, the Supreme Court turned the tables.

The five judges did not rule on the issue of fairness itself.

They decided that the parts of the 1999 Unfair Terms in Consumer Contract Regulations (UTCCR) that the OFT was trying to invoke did not, in fact, give it the powers it thought it had.

The judges said that overdraft charges were part of the price that customers agreed to pay for the package of services their banks provided, and as such were excluded from the scope of the regulations.

What next?

The OFT has a number of options. It can:

• publish its investigation into the actual fairness of bank charges, which it has been conducting since March 2007

• find other laws or regulations with which to attack bank charges

• ask the Competition Commission to launch an enquiry into overdraft fees on the grounds that they reflect a lack of competition in the banking industry

• throw in the towel and admit it does not have any power to challenge bank fees at all

• ask the government to change the law to give it increased legal powers

• encourage disgruntled consumers to use the proposed new laws in the Financial Services Bill which will give groups of customers the right to bring court actions against financial institutions

• ask the FSA under its new fairness rules to investigate the way banks charge overdrawn customers.

The government has already told the banking industry to devise a fairer way of charging overdrawn customers in the future.

This may bring no encouragement to the more than one million people who feel they have been overcharged in the past and who have demanded refunds.

Their previously frozen complaints are now either being considered by their banks, or where legal action was started, may soon be decided by county court judges.

"We have here an industry whose business model is predicated on the failure of up to 30% of its clients to repay their overdrafts," said Marc Gander of the Consumer Action Group (CAG).

"If the OFT is not going to act as the consumer champion, who is?"

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