Page last updated at 13:00 GMT, Thursday, 24 April 2008 14:00 UK

Banks lose overdraft charges case

Mr Justice Andrew Smith
Mr Justice Andrew Smith's decision will affect millions of bank customers

The UK's biggest banks have lost a test case about overdraft charges.

A judge has decided that the Office of Fair Trading (OFT) can rule on the fairness of the charges, which many customers have been trying to reclaim.

Mr Justice Andrew Smith said his judgement 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 the county courts will be frozen until 22 May, by which time the banks must decide whether they are going to appeal against the ruling.

Any additional High Court hearings after that date may further delay those claims.


This does not necessarily mean they [the charges] are unfair
Mr Justice Andrew Smith

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

The banks have consistently argued that their charges were fair and reasonable.

Campaigners have welcomed the judge's ruling as a victory for consumers.

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

But Angela Knight, of the British Bankers' Association, said: "We need to take what the judge has said very carefully and not jump to conclusions. This is the start of a process."

The judge decided against the OFT on two points. He said most of the banks' terms and conditions were plain and intelligible.

And he added that the charges could not be challenged under common law.

Test case

This judgement means the OFT should be able to decide what a fair charge would be for unauthorised overdrafts.


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The OFT described the ruling as an "important early milestone" for its investigation into an area of "high consumer interest".

"We are continuing our investigation into the fairness of these terms and will consider our position after reviewing the detail of this judgement," added the OFT statement.

Both the banks and the courts have been deluged with claims since the beginning of 2006, which they were finding very difficult to deal with.

But since both sides agreed to stage the test case, tens of thousands of claims have been put on hold in either the county courts or with the Financial Ombudsman Service (FOS).

The BBC has estimated that last year the banks refunded about 784m to nearly 378,000 customers.

'Snowballing situation'

Paul Tilley, a law student from Southampton, was one of those customers.

He says he won back 4,000 including interest after his bank imposed charges for exceeding his overdraft limit.

He has an outstanding claim with another bank and hopes the test case will force banks to change their behaviour.

"Looking at my statements from the time, they were taking up to 180 a month off me in charges, it then left me short for paying my bills."

"As a result my payments bounced, I then went over my overdraft again."

"It was a snowballing situation."

Further cases

The OFT first agreed last July, with seven banks and the Nationwide building society, to stage the test case to decide if it had the power under consumer contract regulations to regulate overdraft charges.

The issue of the OFT's jurisdiction was then thrashed out during 14 days of complicated High Court hearings in January and February.

At stake is not only the ability of aggrieved customers to reclaim their charges but also the ability of the banks to generate an estimated 3.5bn a year in income from levying them.

If the banks eventually suffer a complete defeat on the issue, then it has been widely predicted that they will try to recoup their losses by abandoning the long standing policy of so-called "free banking" for customers in credit.

Instead, monthly or annual charges could be introduced as standard for running an ordinary current account.

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