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Last Updated: Monday, 14 January 2008, 14:48 GMT
Bank charges court test to open
Cash machine
Banks argue a ruling against them would end "free" services
Banks and their customers are awaiting the start of a High Court test case which could bring a fundamental change to UK High Street banking.

The outcome may decide how much banks can charge millions of account holders who go overdrawn without permission.

The Office of Fair Trading (OFT) is challenging seven leading retail banks and the Nationwide building society.

The regulator claims the banks' overdraft charges are unfair, but the banks say they are entirely legal.

"We have always believed that what we are doing is correct and legal," said a spokeswoman for the British Bankers' Association (BBA).

"We are confident and think the hearing is an important opportunity to bring some clarity to the legal position," she added.

Angry customers

The case is an attempt to resolve the legal issues at the heart of the unprecedented wave of mass litigation, which has swept the country during the past two years.

If the banks win then this gives them the green light to charge whatever they want
Marc Gander,
Consumer Action Group

Several hundred thousand bank customers are estimated to have won more than half a billion pounds in refunds from their banks in 2007 after accusing them, often in local court proceedings, of imposing excessive overdraft fees that were unfair and illegal.

These fees can amount to more than 30 for going into the red or having a cheque bounced, and in some cases customers have been refunded thousands of pounds each.

"We are very hopeful the OFT will win," said Phil Jones of the consumer body Which?.

"We think they have a strong case and so do consumers in the court of public opinion."

The first two days of the hearing have been reserved for the judge to read case documents, with the first arguments put to him on Wednesday.

Legal argument

Initially, the OFT will not ask the judge to make a straightforward ruling over whether the banks' charges are unfair.

At this stage we will not ask for a ruling on fairness
OFT spokesman

Instead the regulator will argue that the overdraft charges, which the banks have been describing in their literature as "fees for a service", come under the scope of the 1999 Unfair Terms in Consumer Contracts Regulations.

The OFT says this gives it the authority to decide if the charges or fees are unfair, and also gives it the power to do something about it.

"This is all about seeing if the regulations apply," said an OFT spokesman.

"At this stage we will not ask for a ruling on fairness," he added.

The regulator will also argue that the banks' terms and conditions are not written in sufficiently plain English, a factor which would also give the OFT jurisdiction over them.

For their part, the banks argue that their charges are a fee for a service and not a penalty charge, and also that they form a core term of their contracts with their customers.

As such they say the consumer legislation simply does not apply.


Since the announcement of the test case last summer, the cases that had threatened to swamp county and district courts have largely died down.

This risks increased charges for people who remain in credit and possibly the withdrawal of banking services from unprofitable poorer customers
Julian Skan, Accenture

This was a result of a general stay on new cases that has been upheld by judges at the request of the banks and the Financial Services Authority (FSA).

But if they lose the High Court argument, the banks will lose a source of income worth about 10m a day, according to OFT calculations.

They might also have to trawl back through the records of all their customers for the past six years to offer compensation to anyone who had been overcharged, a bill that would run to billions of pounds.

Marc Gander, of the leading campaign group the Consumer Action Group (CAG), said the outcome of the case would be extraordinarily important.

"If the banks win then this gives them the green light to charge whatever they want or whatever the market will bear," he said.

However some commentators have warned that even if the regulator succeeds, consumers may not benefit as much as they expect.

"Prior to the court case... in most cases refunds were offered in full if customers pressed their banks with the threat of legal action," said David Kuo, head of personal finance at the Motley Fool website.

"However, a win by the OFT could result in banks refunding only the difference between charges set by the regulator and the fees in dispute.

"This is likely to see bank customers being offered lower levels of compensation," he added.

The banks will get their money one way or the other as they are not a charity.
Andrew Lye, Pembrokeshire

The banks say that if they lose they could be forced to make up for lost income by levying new charges on other customers, bringing about the end of so-called "free banking" in the UK.

"This risks increased charges for people who remain in credit and possibly the withdrawal of banking services from unprofitable poorer customers, while seeing charges extended to many more people," said Julian Skan of the consultancy Accenture.

That view is disputed by Which?.

"We don't accept free banking actually exists or that it would be acceptable for customers to face high extra account charges instead," said Phil Jones.

Long delay

It is now two years since the huge consumer campaign against bank charges took off.

But if the OFT wins, this will not automatically lead to compensation being paid to customers whose claims for refunds are currently stuck in the legal system, or who may belatedly realise they are owed money.

The issue of compensation, if any, will be dealt with by the FSA and the Financial Ombudsman Service.

The High Court hearing is expected to last eight days with a judgement being delivered by the court around Easter.

However, whichever side loses is highly likely to appeal - possibly all the way to the House of Lords - which means the issue may not be resolved until next year.

The significance of the test case explained

Are bank charges unfair?
14 Jan 08 |  Have Your Say

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