Consumers are closer to reclaiming millions of pounds worth of bank charges following a historic High Court judgement today.
Mr Justice Andrew Smith has ruled that charges levied by banks for unauthorised overdrafts are subject to ‘unfair contract’ regulations.
The judgement paves the way for a the Office of Fair Trading (OFT) to decide what level of charges is fair, and, failing that, a court could decide it.
You incur the charges if you go into the red and the bank hasn’t authorised this, or if you breach your authorised limit. On top, you can end up forking out when, for example, the bank bounces a cheque. These fees can be has high as £38.
It’s estimated that banks make between £2bn and £3.5bn a year in unauthorised overdraft charges.
Amount that banks are estimated to make each year from these charges
A test case was jointly brought by the OFT and seven high street banks and a building society to clarify the law after consumers began to reclaim hundreds of millions of pounds of charges through the courts.
The judge said today that he accepted the banks’ argument that such charges were not unenforceable on the grounds they amounted to a penalty. The banks had said the charges were not penalties that these customers had to pay for breaking their agreement with their bank – because going into the red wasn’t breaking an agreement.
And he held that the terms, with a few minor exceptions, were in ‘plain and intelligible language’.
But he rejected their argument that the charges were exempt from assessment for fairness under the regulations.
The banks had previously been granted a waiver by Financial Services Authority (FSA) allowing them to put off dealing with any claims until after the outcome of the test case.
The banks have the option to appeal today’s decision and if this happens the FSA waiver is likely to remain in place during the appeals process.
This means that all pending cases in the county courts or with the Financial Ombudsman Service are likely to stay on hold and banks will continue to charge overdraft fees.
Which? personal finance campaigns manager Doug Taylor said: ‘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.
‘The FSA must now drop its waiver so that the thousands of cases pending in the county courts and Financial Ombudsman Service can be processed.
‘Every second that this issue remains unresolved is costing consumers up to £111 in overdraft charges.
‘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.’
Annual results for the major high street banks show they have so far paid out more than £559 million in refunds to customers who complained about unauthorised overdraft charges.
It’s estimated that banks could collectively face a bill of more than £1.1 billion from the issue.
The banks have until 22 May to decide whether to seek permission to appeal against today’s ruling.
A legal source for one of the banks said: ‘It is fair to assume an appeal will be lodged.’
The OFT may decide to cross-appeal against the judge’s findings on the ‘non-penal’ nature of the charges and the clarity of the language used in the banks’ terms and conditions.
An OFT spokesman said: ‘We will now be considering the judgment and will take the appropriate time to digest it before responding.’