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Court ruling on bank charges due

The Supreme Court will hand down a judgement on Wednesday that could lead to billions of pounds being refunded to millions of bank customers.

Lord Phillips will reveal the Court's decision on an appeal by seven banks and the Nationwide building society.

They want to stop the Office of Fair Trading using consumer protection rules to investigate the fairness of their charges for unauthorised overdrafts.

The decision follows more than two years of test case litigation.

So far the banks have lost at both the High Court and Appeal Court stages of the test case.

Both of those courts agreed with the OFT that it has the power, under the Unfair Terms in Consumer Contracts Regulations (UTCCR), to scrutinise the fairness of overdraft fees.

But the banks have refused to give in, as about £2.6bn of annual income is at stake.

THE STORY SO FAR...

<LI class=bull>Nearly a million people have claimed for the return of their unauthorised overdraft charges but their cases are on hold <LI class=bull>If the banks win their latest appeal, these people are unlikely to get any money back <LI class=bull>If the banks lose, then the legal arguments should move on to a key stage - a case to determine whether these charges were fair or not <LI class=bull>Only then will people have a clearer picture as to whether billions of pounds will be handed back to customers

At the House of Lords appeal during the summer, the decision on which is now being handed down, the banks argued that the legislation simply does not give the OFT the powers it thinks it has.

OFT victory?

If the OFT wins then it will open the door for it to announce that overdraft charges are indeed unfair, when it reveals the result of its parallel investigation into them soon.

In theory that should trigger an automatic refund of all banks charges that have been levied since July 2001.

Some campaigners have argued that any refunds should stretch back even further, to the start of 1995, when the UTCCR regulations first entered UK law.

The banks, OFT, judiciary and the Financial Services Authority (FSA) agreed the test case procedure to resolve these legal issues in July 2007.

But that agreement also envisaged a further round of legal hearings in the High Court.

This would decide if the OFT was right to say bank charges had been unfair in the past, and would decide exactly what level of charges might be fair in the future.

The government is fearful that this second stage of litigation could last until 2015, and over the summer called publicly for both sides to come up with a much quicker way of resolving the issue.

The government is now the leading shareholders in Lloyds Banking Group, and RBS, which owns Nat-West.

It may be able to exert pressure on the banks to cut a deal with the OFT and not to take up their right to have all issues of fairness decided by another long drawn out series of court hearings.

Bank victory?

If the banks were to win their appeal, it would completely undermine the efforts of the OFT for the past three years.

“ Whether it is fair or not, we may have to come to terms with having to pay for our banking, but if we do there will be increased expectations on levels of service and quality of product ”

Andrew Hagger, Moneynet

It would also be a crushing defeat for the attempts of campaign groups and media organisations which have encouraged people to launch refund claims in the county courts.

The OFT has claimed that even if it loses, it will still try to use other powers, perhaps by instigating a full competition commission enquiry, to attack overdraft fees.

But a loss in the Supreme Court would amount to the second significant legal defeat for the OFT.

At the High Court it was told that bank charges could not, as was once widely claimed, be regarded as unfair penalties under common law.

The losing side, whoever it turn out to be, could in theory try to take the issue to the European Court of Justice

However such a route of appeal is not automatic.

The Supreme Court is the gate keeper for such appeals and can only authorise one if there is an area of uncertainty about legislation derived, like the UTCCR, from European law.

At the House of Lords hearing neither the OFT nor the banks expressed any enthusiasm for a European appeal as it would string out the test case by at least another year.

Monthly fees

The test case has led to the freezing of more than one million claims by bank customers for the return of their fees, with their claims being put on hold either at the banks, in the court system, or at the Financial Ombudsman Service.

An OFT victory would lead to pressure for the stay on those cases to be lifted.

Any organised refund would affect all bank account holders who have paid overdraft fees in the past few years, not just those who have chosen so far to demand one.

A consequence of the OFT winning at the Supreme Court is that it would probably lead to demands from the OFT for banks to change the way they levy overdraft fees in the future.

The banks may be told to slash them to a level much closer to the maximum £12 a time levied by credit cards companies on defaulting customers.

This could lead in turn to a return to the old system of monthly or annual bank account charges, even for customers who stay in credit, as the banks seek to recoup any lost revenue. "Whether it is fair or not, we may have to come to terms with having to pay for our banking, but if we do there will be increased expectations on levels of service and quality of products," said Andrew Hagger, of Moneynet.

Story from BBC NEWS:

http://news.bbc.co.uk/go/pr/fr/-/1/hi/business/8376906.stm