Consumers are one step closer to victory in the battle against bank charges. The High Court has ruled that the Office of Fair Trading (OFT) does have the power to decide whether or not the fees levied by banks and building societies when a customer exceeds their overdraft limit are fair.
This announcement is great news for the millions of people who have paid hundreds, and sometimes thousands of pounds, in overdraft charges. However, those seeking refunds are still not guaranteed their money back as the case is far from over.
We explain what the court case is about and look at what happens next.
What are unauthorised borrowing fees?
These are the fees levied by current account providers when customers go overdrawn without permission, exceed their overdraft limit, have a cheque bounced or direct debit or standing order declined because of a lack of funds.
Such charges are supposed to cover the administration costs involved and banks and building societies should not make a profit from them. However, institutions are estimated to be making around £3.5billion a year from these charges.
Unauthorised borrowing fees can be as high as £39 and you can incur numerous charges in a single day. In many cases people have been charged hundreds of pounds for exceeding their overdraft limit for just a few days.
Why has there been a court case?
The OFT launched an investigation into the fairness and legality of overdraft charges in September 2006, following a similar probe into credit card charges.
As a result of the credit card enquiry, the OFT ruled that penalty charges should be no more than £12 and providers were forced to cut their fees.
However, the investigation into overdraft charges proved more complicated and in May last year the OFT announced a more in-depth study was required.
By that time, a consumer revolt had begun and more than one million people had contacted their bank demanding a refund on the charges they had paid. Many were successful. The big five high street banks – Barclays, Halifax Bank of Scotland, HSBC, Lloyds TSB and Royal Bank of Scotland, which owns Natwest – have paid out nearly £800m in refunds.
Unsurprisingly, the banks still claim that their charges are fair and argue that refunds were given as gestures of goodwill.
Last July, the big five banks, along with Abbey, Clydesdale Bank and Nationwide building society agreed with the OFT to go to court over the issue.
The first stage of the test case began in January and has culminated in the judge, Mr Justice Andrew Smith, ruling that overdraft charges come under "unfair contract" rules.
What happens now?
While the banks have lost the first ruling, this does not mean the battle is over. The next stage of the test case, which will take place on May 22, will decide whether or not overdraft charges are indeed fair.
In response to Mr Justice Smith's ruling, the British Bankers' Association reaffirmed the banks' belief that unauthorised borrowing fees are fair and added that, as such, the charges will be upheld by the court at the next stage of the hearing.
A decision on the second phase of the court case is expected in July, but even then things are likely to rumble on.
The side that loses the next ruling will probably appeal and industry analysts do not expect the issue to be finally resolved until next year.
What does this mean for consumers?
When the court case was announced last summer, the Financial Services Authority (FSA), the city regulator, issued a waiver which meant that banks and building societies did not have to settle any more complaints about bank charges.
The waiver was issued in July and remains in place for 12 months or until a resolution is found. Given that the court case is ongoing and is unlikely to be settled before July it seems probable that the 12-month deadline will be up first. The FSA said it will then review the situation and decide whether or not to extend the waiver further.
This means that anyone who has submitted a complaint and asked their bank for a refund may well have to wait until next year before their case is looked at.
There is an exception however. The FSA's waiver stipulates that banks should still assess the complaints from anyone in financial hardship.
What if I haven't yet lodged a complaint, is it still worth doing so?
Yes. While the banks aren't currently looking into complaints about overdraft charges (with the exception of those from people in financial hardship), it is still worth registering a refund request.
You can only claim for charges you have incurred within the past six years (five in Scotland), so if you wait until the case between the OFT and the banks is finally resolved, you may not be able to claim for old charges. It is therefore worth logging your complaint now even if it will not be processed for a while.
What is the likely result of the court case?
Obviously no one knows, but one thing is for sure and that is that the banks will fight this to the bitter end. If they lose, some analysts have estimated that they may have to pay out around £5billion in refunds. They will also not want to lose the £3.5billion a year in revenue these fees generate.
If the court decides that overdraft fees are unfair, then the OFT will probably place a cap on the maximum that can be charged as it did for credit card fees. Banks and building societies will then have to refund the difference between the cap and the amount they used to charge.
Consumer groups will argue that such refunds should be automatic, but as is the case with credit card fees and mortgage exit fees, it is more likely that customers will have to put in a claim for a refund.
Will there be any other repercussions from this?
Again, it is difficult to say at this stage. However, if banks and building societies are forced to reduce their overdraft charges they will probably look to recoup the lost revenue in other ways. Possible ways of doing this include the introduction of monthly current account fees or other new charges, higher interest rates on overdrafts and lower interest rates on accounts in credit.
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