Page last updated at 10:40 GMT, Thursday, 24 April 2008 11:40 UK

Q&A: Bank charges test case

Bank notes
Last year the banks refunded about 784m to nearly 378,000 customers

A High Court judge has ruled in favour of the Office of Fair Trading (OFT) in a crucial test case which could have widespread consequences for millions of banking customers in the UK.

The OFT believes the overdraft charges levied by banks and building societies are unfair and wanted the High Court to rule accordingly.

However, the banks insisted their fees were legal.

Yet, a huge number of cases brought by customers against their banks will remain on hold until 22 May, by which date the banks will decide whether to appeal against the ruling.

That means people will have to wait to see if they will get a pay-out, probably for some time yet.

What exactly has the High Court been deciding on?

The OFT was challenging seven leading banks and the Nationwide Building Society about the fairness of their unauthorised overdraft charges.

Customers are sometimes charged more than 30 for going into the red without permission, an amount which the OFT and consumer groups argue is significantly higher than the true administrative cost.

However, the OFT did not ask the judge to make a straightforward ruling that the banks' charges were unfair.

Instead its case argued that the overdraft charges come under the scope of the 1999 Unfair Terms in Consumer Contracts Regulations. The judge agreed with them.

This means the OFT now has the authority to decide itself if the charges are unfair, and the power to force the banks to change their practices as a result.

The regulator also argues that the banks' terms and conditions are not written in sufficiently plain English, something else that would give the OFT jurisdiction to act, yet the judge ruled against this.

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 said the Unfair Terms legislation does not apply.

Why did the case reach the High Court?

The test case was announced last summer, in response to an unprecedented wave of mass litigation which has swept the country during the past two years.

The BBC has estimated that last year the banks refunded about 784m to nearly 378,000 customers who accused them, often through local court proceedings, of imposing excessive overdraft fees that were unfair and illegal.

In the vast majority of cases the banks chose to settle before the matter reached court. This has meant no legal precedent was set.

But the growing volume of cases led to an agreement between the banks and the OFT to seek a High Court ruling to ensure what the regulator called a "clear and orderly resolution" to the issue.

What is at stake?

Potentially billions of pounds and the future of free current account banking.

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

In addition, some senior banking industry figures have suggested that the loss of income from charges - which the OFT estimated to be worth about 10m a day - could lead to introduction of monthly current account charges.

Most UK bank customers enjoy free banking while in credit, whereas in many other countries current account fees are commonplace.

Is the end in sight?

Not really.

There could be an appeal, possibly all the way to the House of Lords, which means the issue may not be resolved until next year.

Thursday's ruling does not automatically lead to payouts for customers.

It is expected that the question of compensation would be dealt with by the Financial Services Authority (FSA) and the Financial Ombudsman Service (FOS).

Can people still complain about bank charges?

Yes. Consumer groups are urging customers who are unhappy about their charges to continue to make a claim against their bank.

However, banks will not process complaints at this stage because they are still covered by a "waiver" granted to them by the FSA in July when the test case was announced.

This says they do not have to make progress with any new or unresolved complaints about their charges until the outcome of the court case.

In addition, since the test case announcement, most courts have also been halting new and existing claims for the return of overdraft charges until the legal issues are settled.

Some estimates suggest as many a million cases have been left in limbo. These cases will now remain on hold until the end of May when the banks will decide whether to appeal against the judge's ruling or not.

But campaigners argue it is still worth reporting new claims as banks must acknowledge them. This means customers' details would already be on the banks' systems should they lose the legal action and be told to pay compensation.

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