Billions of pounds of past and future bank income are at stake
The House of Lords has been told that banks are not "Robin Hoods in reverse" when they levy overdraft fees.
Seven banks and the Nationwide Building Society have started their Appeal to stop the Office of Fair Trading (OFT) regulating their overdraft fees.
Jonathan Sumption QC claimed the banks were not taxing the overdrawn for the benefit of others.
However, he told the Law Lords that overdraft fees involved a large element of cross-subsidy.
The outcome of the hearing may decide if millions of bank customers are able to reclaim billions of pounds in past charges from their banks.
Mr Sumption, for the banks, argued that existing consumer contract regulations did not give the OFT the power to regulate prices.
THE STORY SO FAR...
Nearly a million people have claimed for the return of their unauthorised overdraft charges but their cases are on hold
If the banks win this week's appeal, these people are unlikely to get any money back
If the banks lose, then the legal arguments should move on to a key stage - a case to determine whether these charges were fair or not
Only then will people have a clearer picture as to whether billions of pounds will be handed back to customers
He said that bank overdraft fees were required to be clear but were not necessarily required to be fair.
The High Court and the Court of Appeal have both previously upheld the right of the OFT to scrutinise the fairness of bank charges under the 1999 Consumer Contract Regulations.
Mr Sumption said both of the lower courts had been wrong, and had both over-refined and overcomplicated the interpretation of the regulations.
He pointed out that the regulations were not designed as a mechanism of price control and were not aimed at regulating what services were offered or the price charged.
They did not, he argued, apply to the main subject matter of a contract or the price being charged for it - only to ancillary or contingent charges.
"The overdraft charges are too fundamental to the bargain to be declared unfair," he said.
He told the five Law Lords hearing the appeal that overdraft fees involved a large element of cross-subsidy.
Jonathan Sumption QC is arguing the banks' case
People who went overdrawn without permission were paying part of the cost of providing current accounts to people who always stayed in the black.
So the charges exceeded the cost of dealing with an overdrawn customer because "the revenue stream is essential to the whole of the current account structure".
Mr Sumption explained that cross-subsidies were common in the banking industries of other countries such as France, Canada, Australia and the US.
He said they were common in the charging structures of many other complex sets of services such as airline ticket prices or mobile phone tariffs and were not objectionable.
One of the Law Lords asked if it was the case that bank charges included a surcharge to subsidise those who did not go into the red.
Another Lord suggested overdrawn customers were being taxed for the benefit of others.
But Mr Sumption said it was "tendentious nonsense" to suggest that banks were operating as Robin Hoods in reverse.
He went on to say that a victory for the OFT might render all past overdraft payments unenforceable and might lead to "restitution".
"The OFT has significantly raised the stakes," he said. "The issues are of considerable importance to consumers and the future of retail banking."
Mr Sumption spent the rest of the day picking apart the earlier rulings by the High Court judge Mr Justice Andrew Smith and the three judges in the Court of Appeal.
In particular, he said the Appeal Court had been "fundamentally wrong" to draw a distinction in the regulations between essential terms and prices, which could not be scrutinised by the OFT, and non-essential or incidental terms and prices - such as overdraft fees, which could be regulated.
"The distinction between core and non-core prices have no place in the regulations," he said.
"No such distinction can be found in the language of the regulations. All prices are by their very nature essential as the contract cannot work if the price is unenforceable."
Mr Sumption went on to describe the Court of Appeal's approach as "opaque and impractical" which might lead to "absurd" conclusions.
"The courts are not authorised to treat some prices as inessential," he said.
The hearing is expected to finish on Thursday.