Last April, the High Court ruled that the Office of Fair Trading (OFT) has the power to decide whether or not the fees levied by banks and building societies when a customer exceeds their overdraft limit are fair. However, the eight institutions involved in the court case appealed against the ruling last summer.

More the one million people have complained to their current account provider about bank charges they have incurred but most claims have not been processed since the court case began in July 2007.

The Financial Services Authority (FSA) implemented a waiver which means that complaints regarding penalty charges do not currently have to be investigated.

The waiver still stands but today’s announcement means we are closer to a resolution in this ongoing battle between current account providers and the OFT.

The OFT now has the green light to decide whether or not charges levied by banks and building societies if a customer exceeds their overdraft limit, goes overdrawn without permission or has a payment declined due to insufficient funds, are fair. If it rules that they aren’t, current account providers could be forced to repay billions of pounds.

The OFT estimates Britain’s banks net around £2.5billion a year from these charges.

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.

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 inquiry, 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 2007 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 and around £1billion has already been refunded.

In July 2007 seven banks – Abbey, Barclays, HSBC, HBOS, Lloyds TSB, RBS, Clydesdale – and Nationwide Building Society agreed with the OFT to go to court over the issue – they continue to insist that these charges are fair and justifiable.

What happens now?

The High Court’s decision not to uphold the banks’ appeal means the OFT will now rule whether or not unauthorised borrowing charges are fair.

However, the OFT’s ruling could still be some way off – it has said it aims to make an announcement before the end of the year. So, anyone who has lodged a complaint with their bank will still have to wait before it is processed.

What is the OFT likely to rule?

We obviously don’t know yet. Unless current account providers are able to prove that the fees they charge customers do reflect the costs involved, the OFT is expected to impose a cap as it did with credit card fees.

If a cap is imposed anyone who has incurred penalty fees will be eligible for a refund. However, this is not likely to be a full refund – instead individuals will receive the difference between the cap and the amount they were charged. For example, say a cap is set at £15 and you were charged a £30 fee you would get £15 back.

Individuals are allowed to claim for charges incurred since July 2001.

Will refunds be paid automatically?

If the OFT decides that unauthorised overdraft charges are unfair it will open up the floodgates for customers to reclaim the fees they paid. However, it is not yet clear whether the money will be refunded automatically or whether individual will have to make a claim for the money they are owed.

Is it still worth lodging a complaint?

Because of the FSA waiver, most refund requests are not currently being processed. However, it could still be worth logging your complaint. Under the terms of the waiver, banks and building societies must investigate cases if the individual is in financial hardship. And even if you aren’t, it is still worth getting your claim registered because as soon as the waiver is lifted you will know that you are in the system in case refunds won’t be paid automatically.

What will this mean for the current account market?

Kevin Mountford, head of banking at, said: “It will be interesting to see how much reform the OFT will be willing to push for. With so many banks in such a perilous state already, they could be rocked even further if they are forced to refund all customers.

“And it’s important to consider what impact this will have on the consumer in the long-term and it does seem that the end of free banking is nigh. I’d expect banks to replace penalty charges with a regular charge on current accounts, this mirroring the system used most consistently across the world. The consumer could still be hit in the pocket as the banks look for other ways to recoup this lost revenue in order to retain the profitability of current account customers.”

Some banks have already changed the way they structure their overdrafts. Halifax has recently launched a new current account, its Reward Account, which has no penalty fees. Halifax has also abolished an annual rate of interest on overdrafts. Instead customers are charged £1 a day for going overdrawn up to £2,500. They can borrow more with authorisation but will be charged £2.00 a day for extra borrowing. If they exceed their agreed overdraft limit, the cost is £5 per day.

Barclays also restructured its overdraft last year – it reduced its penalty fees to £8 and introduced a £250 interest-free overdraft buffer, called a ‘personal reserve’. However, it also increased the rate of interest it charges customers for going overdrawn.