tephen Hone, a 30-year-old law student, struck a blow for millions of bank customers earlier this year. He may not have known it at the time, but his victory in winning £5,000 compensation from Abbey after taking the bank to court over two £35 charges he incurred for bounced cheques, paved the way for every other customer hit with similar penalties to challenge their banks.
Mr Hone told a Plymouth court that the charges breached the 1999 Consumer Contracts Regulations, because they were substantially in excess of the costs Abbey could have incurred dealing with the problem. "The money may not seem a big deal to Abbey, but when it charged me £70, the only earnings I had to support my children were £70 a week from a part-time job, which was completely wiped out," he says.
Several months later, thousands more customers are now filing similar claims against their banks. The consumer group Which? says 100,000 people have consulted its website, which gives advice on how to challenge unfair overdraft charges, and complainants have also won support from regulators.
In May, the Office of Fair Trading announced it had decided that credit card companies that charged borrowers more than £12 for paying bills late or exceeding borrowing limits were breaking the law. It also said it would investigate the same question in the banking sector - a review now expected to conclude next year.
The issue is that under British law, lenders are not allowed to charge more than the costs they have actually incurred when processing late payments or credit limit breaches. They can't make a profit out of charges that are supposed to simply reflect the cost of a customer's mistake.
Yet this is what banks have been doing for years. Which? estimates that Britain's biggest banks earned £4.7bn from unauthorised overdraft charges last year alone. Lloyds TSB, for example, charges £30 a day for unauthorised overdrafts, while Halifax charges £30 every time a customer tries to process a transaction for which he does not have sufficient funds.
"The banks have traded on their reputation for integrity to foist their penalty charges onto an acquiescent public," says a spokesman for the Consumer Action Group, an online campaign set up to persuade people to challenge late penalty fees. "The truth is that these penalty charges are unlawful."
Martin Lewis, of the Moneysavingexpert.com website, which has also taken up the campaign, says many banks still try to hide behind the fact that they set out overdraft charges in their terms and conditions. "But if someone told you they were about to punch you before smacking you, it wouldn't make it legal," says Lewis. "The same is true with bank charges."
For now, at least, there is no standard procedure that enables bank customers to win compensation. The Financial Ombudsman Service can consider certain types of complaint but has yet to hear any cases that could pave the way for automatic refunds for all.
That means people have to take on the banks themselves. But doing so is worthwhile. Doug Taylor, a personal finance campaigner at Which?, says most successful complainants have won several hundred pounds, with some winning thousands.
The story below explains how to build your case for a refund, but, in practice, most customers have found their banks have caved in well before reaching the courts. The banks are very worried that a court ruling could set a legal precedent for compensation payments, so for now - particularly in advance of the OFT's ruling - they are keen to settle cases out of court.
In the few cases that have made it before a judge, consumers have won some interesting victories. Two weeks ago, one court ruled that the cost for credit card company Egg of processing a late payment was just £5 - less than half the limit set by the OFT.
How to take on your bank over charges
* If you have been charged for going into an unauthorised overdraft, you may have a claim for compensation. You are entitled to claim for charges going back six years, so you may need to write to your bank, requesting a complete list of charges over this period. The bank must comply with your request within 40 days, though it may charge you up to £10 for doing so.
* Once you've worked out the charges, write to the bank to say that as a loyal customer, you are unhappy with this treatment. Request a refund, with interest.
* Give the bank time to respond - a month, say. If you do not receive compensation then, write a second letter, reiterating your complaint and warning you will take legal action if the matter is not resolved within a set time.
* The final step is to take your bank to the Small Claims Court. It's a simple service that costs around £80, refundable if you win your case. The website ( www.hmcourts-service.gov.uk) explains how to make a claim and provides all the forms.
* In almost every case filed so far, the banks have settled out of court, but you may not even need to go this far. Which?, the consumer group, estimates two-thirds of customers who complain about unauthorised overdraft charges win compensation before getting to the stage of making a claim at the Small Claims Court.
* Which? publishes a range of helpful template letters and claims forms on its website ( www.which.co.uk), which you can use for this process.