THE curtain will tomorrow lift on the long-awaited court battle between the big banks and consumer champions at the Office of Fair Trading over the running sore of unauthorised overdraft charges.
A victory for the OFT could force banks to cut their fees, but might also herald the end of free banking for millions of other customers who now pay nothing for current account services.
A test case is being brought jointly by the consumer watch
dog and the main banking groups to establish whether the charges facing customers who overdraw without asking should be capped and controlled by the OFT.
As such it will be a two-act drama. First, the High Court is being asked to establish as a point of law whether unauthorised bank charges are subject to the consumer protection rules known as the Unfair Terms in Consumer Contracts Regulations, which came into force in 1999.
This first act is expected to last about eight days but must finish by February 28.
After the hearing, the OFT plans to publish the results of its wide-ranging inquiry into current accounts and how the market is working. However, we will have to wait until April for a judgment from the court, whereupon the second act will begin.
If the judge decides that banks are subject to fairness rules when levying overdraft charges, the OFT is expected to go back to court and argue that the current level of charges is disproportionate to the service provided and therefore should be cut.
This will give a green light for billions of pounds of compensation to be paid out to customers who believe they have been unfairly penalised and are currently demanding the repayment of up to six years worth of charges. Their claims were frozen pending the outcome of the court hearing.
In fairness, some customers have been hammered by exorbitant fees. Monthly charges can be as high as £28, and banks can levy daily charges and extra fees on top of that: for example, up to £30 each time a customer carries out a transaction or receives a letter or phone call from the bank.
However, banks argue that no one need pay these charges. If you arrange an overdraft facility and speak to your bank before borrowing, fees are far more modest.
Furthermore, they emphasise that in the UK bank customers can receive a wide range of services completely free if they manage their accounts wisely and stay in credit, which is unheard of for much of the rest of the world.
It is a complex issue, which is why both the banks and watchdog have turned to the courts for clarification. There are concerns, for example, about poorer customers cross-subsidising the better off who manage their affairs wisely.
The banks have not helped their case by refusing to disclose the true cost to them of these services. Furthermore, when customers pursue their complaints to court, the banks have tended to settle at the last moment to avoid an unfavourable legal precedent being set. Barclays acknowledges paying out £87m, and Lloyds TSB expects its bill to reach £72m this year. In total the banks are believed to have compensated customers to the tune of £200m.
Consumers have long moaned about high levels of unauthorised overdraft fees, worth £3.5bn to the banks each year. But it was only after the OFT tackled the banks over punitive credit card charges, and pegged fees at £12, that current account concerns came to the fore.
The watchdog first launched an information-gathering exercise, followed by a full-blown inquiry. With expectations rising of the inquiry reaching a similar conclusion to that on credit cards, two million customers made claims for the repayment of charges going back six years.
In general the banks refused to pay up. Some customers took their cases to the county court or appealed to the Financial Ombudsman Service.
Chief ombudsman Walter Merricks stated publicly that he was concerned that he was unable to make a judgment because disputes tended to be settled at a key stage.
A few cases did proceed. Lloyds TSB won against Kevin Berwick in Birmingham in May and Michael Gill in Coventry in June. Lancaster County Court dismissed a case brought by Julian Rudd, also in May.
However, law student Stephen Hone won against the Abbey in Plymouth after arguing that a £64 charge for bouncing a direct debit twice in a month was disproportionate. The bank, which was ordered to pay compensation, did not appear to defend its position so yet again no conclusive decision was reached.
Indeed, in each case which has progressed, judges have made clear their decision was based on the individual circumstances and did not set a legal precedent.
As the courts became jammed with cases, and 14,000 consumers appealed to the Financial Ombudsman, the banks, including the Royal Bank of Scotland Group, HBOS Group, Abbey, Barclays, HSBC, Clydesdale, Lloyds TSB and Nationwide, decided to take a case jointly with the OFT to the High Court to get the law clarified once and for all.
The initial argument is over whether unauthorised overdraft charges are covered by the fair contracts legislation, which is designed to protect consumers against crooked small print, and which excludes "core terms" and "services".
The banks are expected to argue that an unauthorised overdraft facility is a service and therefore excluded.
However, Angela Knight, chief executive of the British Bankers' Association, argues that there is a further problem with the way the UK is implementing the regulations, which are based on an EU directive.
She said: "Elsewhere in Europe these fairness rules are simply about ensuring transparency. No other country uses them to impose charging structures on the banks."
There is a danger that all this consumer activity could score an own-goal for customers. The UK banks have for years wanted to end free in-credit banking. If banks are forced to cut charges for some customers, they may introduce new fees for those who currently pay nothing.
Knight said: "Where we go next for provision of banking services in this country is now in the hands of the Office of Fair Trading and what it says to the court. But no decision can be made without consequences.
"Bank customers in this country receive a wide range of services from their bank for absolutely free. The OFT will have to decide whether it supports this or would prefer a different arrangement.
"This is not a Rumpole Of The Bailey-type win-or-lose situation. No one will win or lose, but we may go down a different path afterwards as a result."
A report from independent economic consultants Oxera Consulting found the UK had the ninth-cheapest bank accounts in the developed world.
A typical Italian, Swedish or Australian family would spend around ?140 annually to run an account, compared with about ?30 in the UK. It would cost the same family in France, Canada and Ireland around ?90 and in Germany ?80.
However, the consumer lobby is determined not to be bullied by the banks. Which? spokesman Phil Jones said: "We would argue there is no such thing as free banking, and many customers are currently getting a very raw deal.
"Complaints are not being treated fairly or consistently. Only the most persistent get compensation. The rest are fobbed off.
"All customers would do better with more openness and transparency."
The full article contains 1251 words and appears in Scotland On Sunday newspaper.
