Bank charges: a setback, but the fight goes on

Nine million bank customers could still win compensation running into billions of pounds from high street banks despite the collapse of a two-year legal case brought by the Office of Fair Trading, campaigners said yesterday.

The Supreme Court threw out the OFT's test case against unauthorised overdraft fees but also pointed out a successful challenge might be possible under a different part of the law.

When yesterday's ruling was handed down by the Supreme Court, it appeared to be a devastating blow to the long-running campaign for refunds of penalty fees, which have mired some customers in debt.

Five law lords, led by Lord Phillips, unanimously dismissed the OFT's case that fees were additional to a main current account service, rendering them capable of being assessed for fairness under the Unfair Terms in Consumer Contracts Regulations 1999.

Instead, the judges ruled, the fees were part of the "core" current account service and thus not subject to a value for money test.

The British Bankers' Association struck a conciliatory note after the ruling, saying that it recognised the concerns of customers. Campaigners were furious that the chances of obtaining massive refunds seemed to have been sunk by repeated appeals by the banks, which had lost two earlier hearings at the High Court and Court of Appeal.

The Supreme Court, which has replaced the House of Lords as the highest UK court, denied the OFT leave to appeal to Europe, stopping its current case dead in its tracks.

"This is a bitter blow for the millions of people who have been patiently waiting to get their bank charges back," said Peter Vicary-Smith, chief executive of the consumer group Which?. "Not only does it give banks licence to charge what they like for unauthorised overdrafts but it could have ramifications for other areas of personal finance."

Scrutiny of the 45-page ruling revealed there was still significant hope for the 1.2 million people whose cases have been put on hold pending outcome of the test case, as well as a further 8 million people billed fees since 2001 who have yet to lodge a claim.

Campaigner Martin Lewis, creator of Moneysavingexpert.com, said: "The initial shock reaction in the court covered what was a key element of the judge's final statement that the OFT may be able to look at fairness by another route'.

"The fact this was deemed important enough to be said in his very short verbal statement is of great significance. After analysis of the report it reveals the court's coded message to the OFT was: 'You can't take the case on this basis, but there may be other avenues under Clause 5 that you could try'."

The OFT launched the test case in July 2007 against eight financial providers: Abbey, Barclays, Clydesdale, HBOS and Lloyds TSB, which are now part of the same group, HSBC, Royal Bank of Scotland Group and Nationwide Building Society.

Unauthorised overdraft charges generate annual revenue of £2.6bn for banks and allow them to subsidise free banking for customers in credit – a practice described during the case as "Robin Hood in reverse".

Customers who go into unauthorised overdraft or breach their agreed limit can be charged £35 for a single bounced payment, whereas the actual cost to the banks is thought to be as low as £2.50.

While the case has rumbled through the courts, several high street banks have changed their fee structures to reduce charges for unauthorised borrowing, while seeking to switch free banking customers to fee-based accounts.

Responding to the ruling, ministers said they were determined to make the system of unauthorised overdraft charges fairer for consumers. Sarah McCarthy-Fry, Exchequer Secretary to the Treasury, said the Government would try to reach a voluntary agreement with the banks but warned that it would "take action" if necessary.

The Liberal Democrat leader Nick Clegg described the cross-subsidising of wealthier customers by indebted ones as "absolutely outrageous".

"Regardless of the legal position, it simply isn't right that someone on a low income should pay £25 or more to their bank just because they're overdrawn by a pound or two," he said. The Conservatives said they would begin a competition review of banks.

Angela Knight, chief executive of the British Bankers' Association, said: "The thing that is important about today's outcome is that there is clarity now in the law."