Bank customers 'support charges'

The case is being heard by Mr Justice Andrew Smith

Current account customers like the present system of charges under which they only pay when they are in the red, the High Court was told.

Laurence Rabinowitz QC was defending the Royal Bank of Scotland, one of eight lenders accused of levying unfair overdraft charges.

The Office of Fair Trading (OFT) wants the court to rule that it can challenge the firms' fees under consumer law.

Mr Rabinowitz said the alternative would be to charge on all transactions.

The outcome of the long-awaited court case could bring a fundamental change to the UK current account market.

The current account product is a bundle of services Laurence Rabinowitz QC

Seven banks and the Nationwide building society agreed to the test case to clarify the legal position, after a mass of litigation which has seen hundreds of thousands of consumers claim refunds running into hundreds of millions of pounds.

If the OFT argument is upheld, it could mean banks and building societies having to return billions of pounds collected from customers over the past six years.

Cross-subsidy

Mr Rabinowitz argued that the present system was fair.

"The current account product is a bundle of services," he told Mr Justice Andrew Smith, the judge hearing the case.

"Charges are being levied for the bundle," he added.

BANK REFUNDS IN 2007 Barclays - £87m HSBC - £116m HBOS - £79m Lloyds TSB - £36m RBS - £81m Source: Bank interim results Key court case underway at last

At the moment, he said, those in the red cross-subsidise those who stay in credit, a business model which is popular with customers.

But, he added, addressing a criticism made by the OFT and consumer campaigners, those in the red were not just paying for their unauthorised overdrafts.

"It is incorrect to say they are charged only for those services," he said.

"The package of services is always being supplied.

"They are at one and the same time charged both for the specific service and the overall bundle of services," he added.

This is the crux of the legal issue at stake.

The OFT claims that bank overdraft charges fall foul of the 1999 regulations that govern unfair terms in consumer contracts.

If successful, it would then have the authority to decide whether the charges are too high.

But Mr Rabinowitz said that according to his analysis, the overdraft charges related in part to the main subject of a customer's contract with their bank for the use of a current account.

He believes the consumer regulations do not therefore apply, a line supported by all the banks.

'Consequences'

He told the judge that if the banks were no longer allowed to charge in this way, they impose charges for every current account transaction.

Angela Knight, chief executive of the British Bankers' Association, has repeatedly warned that an OFT victory would have "consequences".

Experts predict it could lead to the end of free banking for the millions of current account customers who stay in credit and who, therefore, do not currently incur charges.

The hearing resumes on Monday and is now expected to last several weeks, longer than originally anticipated.

An initial ruling is expected around Easter.

However, given the significance of the case, whichever side loses is expected to appeal, possibly all the way to the House of Lords, which means the issue may not be resolved until next year.