Banks and building societies could be forced to return more than £20bn to consumers after the court threw out their appeal over unauthorised overdraft charges and bounced cheques yesterday.

The court ruled that the charges should be regulated by the Office of Fair Trading (OFT) under “unfair contract” rules, clearing the way for the watchdog to set a legal maximum on the fees, which currently earn banks about £2.6bn a year.

Banks have been charging consumers up to £39 for a bounced cheque, standing order or direct debit, although critics say the actual cost could be as little as £2. Although some have reduced their charges in recent months, many are still charging more than £30.

The OFT said the ruling was “very clear confirmation” that it could regulate current account terms and conditions. “This judgment confirms the OFT’s long-held interpretation of this important aspect of consumer law, and is one that consumers themselves would identify with. It is also relevant to businesses across the whole economy,” it said.

Three years ago, the OFT told credit card firms they must limit default charges to £12, and it could now take a similar line with current account providers. The regulator is examining the banks’ terms and conditions and will announce what action will be taken later this year.

The ruling follows a test case last year between the OFT and eight current account providers that was brought after consumers began to contest bank charges, downloading millions of template letters and sending them to banks, which paid out rather than contesting the claims in court.

In yesterday’s judgment the master of the rolls, Sir Anthony Clarke, sitting with Lords Justice Waller and Lloyd, held that the charges for unauthorised overdrafts were not part of the “core or essential” bargain between bank and customer, and therefore an assessment of fairness was not precluded by the regulations.

Martin Lewis, the founder of MoneySavingExpert.com, who alongside Guardian Money has been a campaigner against the charges, said: “The smiles on the OFT’s faces in court show it is highly likely it will find that charges are unfair. After that I would hope that within the next year everyone who has had charges unfairly taken from their bank account will get them back.”

Mark Gander, of the Consumer Action Group, said if the fees were found to be unfair, consumers could sue their banks to get back all fees charged since the unfair contracts regulation was introduced.

However, it seems unlikely that consumers will get their money back soon. Although the seven banks and one building society involved were not given leave to appeal, they said they would contest the judgment. In the meantime, a Financial Services Authority waiver will remain in place. This allows banks and building societies to sit on complaint letters until the conclusion of the case.

Doug Taylor, for the consumer group Which?, said: “In the context of the decline in [the banks'] reputation it would be bizarre if they decided to appeal. For them to engage in spending more money to defend a lost cause would be unfortunate to say the least.” Gander added: “The Lords is going to knock back the banks. This is just a delaying tactic - every day they delay it they are earning more and more interest.”

What happens next

Can I get my charges back?

Not yet. The ruling just allows the OFT to investigate the charges. It needs to decide whether the banks will have to proactively return money.

What should I do while I wait?

If you have paid overdraft charges since 27 July 2001 you should write to your bank requesting a refund. The Financial Services Authority has granted banks and building societies a waiver, allowing them to sit on these letters until the case is over. But if you write now, your complaint will be in the system.

I am struggling with money. How am I expected to cope while the waiver is in place?

It does not apply to letters from consumers in financial difficulty - which it defines as someone who cannot cover reasonable living expenses and bills.

How far back can I reclaim charges?

You can claim anything paid since 27 July 2001.

Hilary Osborne

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