Page last updated at 13:31 GMT, Friday, 26 June 2009 14:31 UK

What next for bank overdraft fees?

By Ian Pollock
Personal finance reporter, BBC News

Lord Phillips, senior Law Lord
The Law Lords, led by Lord Phillips, will give their judgement in the autumn

The banking industry and millions of its customers will have to wait until the autumn to find out if the Law Lords uphold the right of the Office of Fair Trading (OFT) to regulate bank charges.

At stake is the more than £2bn a year that banks earn from charging fees to their customers who go overdrawn without permission.

Nearly a million claims for the refund of fees have been in limbo since the two sides decided, two years ago, to start their legal test case.

But a decision by the Lords will not necessarily bring the waiting to an end.

Firstly, the Lords may refer some of the issues to the European Court of Justice, as the consumer contract regulations (UTCCR) that the OFT is seeking to use derive from a European Directive.

If the Lords do rule in favour of the OFT then the regulator will have to finish its parallel inquiry into the actual fairness of bank charges and then present its findings to the banks later this year.

Interesting arguments

The three-day hearing in the House of Lords was very interesting for several reasons.

I think a refund of past charges should follow almost automatically

Nick Spooner, Legal Beagles

The banks had employed as their main lawyer Jonathan Sumption QC, one of the most highly regarded, and highly paid, barristers in the country.

He went for the jugular and laid it on the line for the Law Lords.

It did not matter, he told them, whether the OFT believed that overdraft fees were unfair and worthy of its scrutiny, or even if charges were generally considered extortionate.

As a matter of plain English, the words written on the pages of the UTCCR meant that the OFT simply did not have the power to scrutinise the charges.

That was because the rules contain an explicit exclusion that means they cannot be applied to the core part of a contract, or to the price that customers are required to pay for a service.

Charged while in credit

The OFT's barrister, Jonathan Crow QC, rejected this interpretation.

Jonathan Sumption QC
Jonathan Sumption QC said it did not matter if bank fees were "extortionate"

And he expanded on a second line of attack.

The OFT was worried, he said, not just about the size of fees, but also the way they were applied in practice.

He outlined a long list of problems, such as people being unable to tell exactly when, and to what extent, they will be charged for going overdrawn, and the fact that fees can be triggered by people going overdrawn by accident.

He also explained that they can be applied to people who appear to be in credit.

A bank customer might, he said, go to an ATM to check his balance and be told he had money in his account.

But if some of the money had not yet been declared as "cleared" by the bank, then whether a cheque or other payment was made from the account or bounced, overdraft charges would be applied, even though the customer had been effectively misinformed by the bank.

Pay back time?

On the face of it, if the Lords agree that the OFT can indeed scrutinise bank charges for their fairness, then the writing will be on the wall for the banks.

Restitution would involve paying damages for what is called 'unjust enrichment'
Marc Gander, CAG

They might then feel it was in their best interests to cut some sort of deal.

That could see them limiting their overdraft fees in the future, and arranging with the Financial Services Authority (FSA) to pay back some money to customers who have been charged in the past.

Alternatively, if the banks do not like the OFT findings on fairness, then they can go back to the courts for a second round of hearings and arguments - an approach agreed between the two sides back in 2007.

But Nick Spooner of the campaign group Legal Beagles thinks the banks may have little scope for negotiation.

"Once the OFT has been given the right to assess the charges as unfair, then I think a refund of past charges should follow almost automatically," he says.

"A second round of litigation would deal with future fees," Mr Spooner suggests.

"Appalling prospect"

The banks may be more than willing to try to dispute any eventual OFT ruling all the way back through the High Court, Appeal Court, and House of Lords, again.

That is because the sums at stake are simply huge, potentially running into many billions of pounds

One thing that became very clear in the Lords' hearing was just how scared the banks are of losing.

Their QC, Jonathan Sumption, warned the Law Lords that victory for the OFT would lead to an "appalling prospect".

He said it would open the way to a "deluge of claims" going back possibly to 1995, when the consumer contract regulations first entered UK law as a result of a European directive.

He suggested that if the past fees were eventually judged unenforceable, then they would have to be repaid in their entirety, not just the top slice that the OFT might think was excessive.

And he said action by the OFT would open the way for "restitution".

"Unjust enrichment"

According to Marc Gander of the Consumer Action Group (CAG), restitution has a clear legal meaning - one which means the banks might have to repay even more money than they had gained by levying the fees.

"Restitution would involve paying damages for what is called "unjust enrichment", he says.

"The banks have taken the fees and charges, and invested them at commercial rates, typically by lending the money to borrowers, and making very substantial profits.

"In theory all that might have to be repaid too," he adds.

The banks are apparently quietly confident that they did enough in the House of Lords to win the argument and stave off the threat of an OFT investigation.

But that would not necessarily mean they could simply carry on as before.

In November, the FSA will take over formal regulation of the way banks treat their customers, though the banking code of business.

"If it is apparent that the UTCCR don't apply to overdraft fees, as the banks contend, one can expect the FSA to pay close attention to the scope and level of fees, under the code," said Ray Cox QC.

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