High Court rules over overdraft charges

The High Court has ruled against banks in a test case over unfair bank charges.

Mr Justice Andrew Smith ruled the OFT could decide if the charges are fair – in a case brought by the watchdog and a group of seven banks and a building society – but further hearings will be needed.

The OFT has initially welcomed the decision, and is now going through the considerable judgement.

Mr Justice Smith wrote in his judgement that terms banks used to explain charges were "plain intelligible language".

"However, I reject the banks’ contention that the relevant terms are exempt from assessment as to fairness," he wrote.

The judge found, in favour of the OFT, that charges can be assessable for fairness, but, in favour of the banks, that charges are not capable of being a penalty.

An OFT spokesman said: "This is an important early milestone for the OFT and our investigation into this area of high consumer interest.

"We are now analysing the implications of the judgement for our overall investigation into the fairness of the terms. There may need to be further hearings to determine any outstanding issues arising from the judgement."

It is estimated banks make £3.5 billion a year from unauthorised overdraft charges – the equivalent of almost £400,000 an hour.

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

"This whole saga has severely damaged the reputation of the UK’s high street banks.

"If they appeal, drag their heels in refunding their customers or try to introduce back-door charges to recoup their losses, their customers will see this as adding insult to injury.”

The banks are now considering the judgement – which extends to 450 paragraphs over 119 pages.

A spokesperson for the British Bankers' Association (BBA) said: "The judgment is complex and the Banks are currently considering its implications.

"Further Court hearings will be required before the test case process is concluded. The likely timetable for the next steps in the test case process will be decided by the Court at a hearing which will take place on May 22nd 2008."

The Financial Ombudsman Service (FOS) – which is handling some complaints – is maintaining its hold on cases, along with county courts.

An FOS spokesman said: "At the moment it looks as though there may be a need for clarification."

He added there was the chance that either the banks or the OFT could appeal some parts of the decision.

The next step – if the banks do not appeal – is for the OFT to continue its investigation into whether charges are fair.

If it deems the charges are too high, it can force the banks – through the courts if necessary – to lower the charges.

During the case the FSA has provided banks a waiver so they do not have to deal with complaints about unauthorised overdraft charges.

However, bank customers who have paid fines are advised to still lodge their complaints.

David Black, principal consultant of banking at Defaqto, said: "The ultimate result of today's ruling will have significant effects on the costs incurred for current account customers, including those who always stay in credit. If, as seems likely, a cap is imposed on unauthorised overdraft charges, I view it as inevitable that the current account options will change for consumers.

"My expectation is that each side will appeal on the part they lost in the test case."

It is thought the banks could now make up for the loss of income from current account penalty fees, charges will be introduced for day-to-day banking.

Eventually overdrafts may not be available on current accounts, unless customers sign up to premium packages that banks are already introducing, linking overdrafts with a number of insurance products.

This follows what happened when credit card charges were trimmed by the OFT, and companies upped their repayment interest rates.

Daniel Barnes