The legal position on bank charges

If you want to skip directly to another section of our guide to reclaiming unfair bank charges, you can click on one of the links below:

• An introduction to reclaiming bank charges
• A step-by-step guide to reclaiming bank charges
• Bank charges: what happens next

There are conflicting views about the legality of unauthorised overdraft charges.

Campaigners argue that:

• Under the Unfair Terms in Consumer Contracts Regulations 1999, bank charges for going overdrawn or for bounced cheques may be considered the equivalent of a charge for breach of contract, known as "liquidated damages", and the courts can enforce payment.

  However the sum must reflect actual costs incurred and not exceed the damage the bank suffered due to the breach of contract. Otherwise it becomes a penalty, which is unenforceable by the courts.

• Also, the level of overdraft charges fails to comply with the "reasonableness" criterion required for service fees under the Supply and Services Act 1982.

Therefore, if you believe you have been unfairly penalized by your bank, you may be entitled to the money back.

Has this argument been tested legally?

In the past six to nine months, many tens of thousands of claims have been made by bank customers, asking for unfair charges to be repaid. In almost every single one, banks have preferred to settle out of court, making offers of compensation at or very near the levels sought by complainants.

However, in the single case so far heard in a County Court, a judge rejected claims of unfairness.

At a hearing in Birmingham County Court in May 2007, the judge said that for any protection against unfair contract terms to kick in, a contract - or a breach of one - needs to be at stake.

But District Judge Cook said that he believed that "if a bank declines to accept the request [to run an overdraft] it is not in breach of contract to the customer. . . and nor is the customer in breach of contract having made the request in the first place."

The judge also turned down the alternative argument, that the overdraft fees were instead really service charges, and as such unreasonable.

Here, the judge decided that the whole package of services provided by the bank to its customers needed to be considered, and weighed against the cost overall. Isolating overdraft charges, and comparing these with the costs to the bank of running these facilities only, would be a "flawed" approach.

There was also another case in Hull, where the judge found in favour of the bank. In this instance, the complainant subsequently admitted that he had not prepared his case as well as he might have done.

But in many other cases, the courts have found in favour of complainants. It should be stressed that none of these court rulings are legally binding, hence the test case that will be heard later this year or, perhaps, in 2008.

Regardless of any court hearings, banks were until recently settling thousands of cases by paying compensation to their customers well before the start of a court hearing.

And, according to the Financial Ombudsman Service, the independent arbitrator in such cases, banks were settling EVERY claim brought before it. All settlements were on a "goodwill" basis.