The first round of the battle to recover billions of pounds in unauthorised-overdraft bank charges for consumers has gone in favour of the man on the street.
Last week, the High Court ruled that the Office of Fair Trading (OFT) had the right to decide whether the charges levied by banks on people who go into the red without permission are legal. If the OFT decides the fees break consumer contract law, it should clear the way for customers to reclaim charges, plus interest. In the past two years more than 300,000 people have either taken their banks to court or threatened to do so to get back the charges they've paid.
Unsurprisingly, the banks are expected to appeal against the ruling and fight tooth and nail to keep hold of the £3.5bn every year, or £400,000 every hour, they make from these fees. But they aren't expected to win.
This all seems good news for customers, but experts believe the banks could have a nasty surprise in store for them, through the imposition of fresh fees. In effect, the UK system of free banking could be brought to an end.
For the time being, things are likely to move slowly. For a start, an appeal against the High Court decision could delay any resolution by a year. All the while, the freeze on bank-charge compensation claims imposed by the Financial Services Authority (FSA) is likely to stay in place.
"This will take years not months to conclude," says Simeon Linstead, head of personal finance at price-comparison-site uSwitch.- com. "Consumers should not be fooled into thinking banks will want to give up the extra revenue that default charges bring in.
"Banking customers have paid out an average of £742 per person in charges over the past six years. It is unlikely banks will be willing to pay all this back," he adds.
There may be the sought- after cap on charges, and these may be more clearly explained, but the long-term implications of the decision is what really concerns those in the know. "This is potentially a huge loss of income, which the banks will be forced to recoup," says Mr Linstead. If they can no longer get this money from consumers who repeatedly incur fees, it will have to be taken from all of the UK's 40 million current account customers.
"The ultimate result of the ruling will be significant effects on the costs incurred for current account customers, including those who stay in credit," says David Black of financial researcher Defaqto. In other words, this could be the end of the road for free banking.
And that may not be the only implication of the banks' loss of earnings. Kevin Mountford at comparison site Moneysupermarket.com predicts that banks will respond to overdraft caps in the same way they reacted to the limits on fees for missed credit-card payments imposed two years ago – with stealth charges. "They will find ways of getting round it. Banks with a number of products can add charges across them all."
Mr Mountford suggests that banks may add fees on top of an account's standard interest rate or APR. Where customers are in the red, they will take payments against the cheapest debt first, leaving those borrowings with the highest rate to accrue interest for longer. Services that have so far been free, such as initial account applications and administration, might begin to incur fees.
"Banks are very creative about bringing in money, especially in uncertain times," warns Mr Mountford. "And good intentions aimed at reducing unfair penalties often backfire."
'Have I left it too late to claim?' Your questions answered
Q. What has happened?
A. Seven banks and the Nationwide building society challenged the Office of Fair Trading (OFT) in the High Court over the legality of the charges they levy on those customers who have unauthorised overdrafts. They lost the case, which means that, in theory, the OFT should now have a free hand to impose limits on such charges. However, the banks can appeal against the court ruling.
Under its chief executive, John Fingleton, the OFT is carrying out a root-and-branch review to see whether bank charges are an unfair penalty on people who go into the red, or whether they reflect the true cost of administering unauthorised borrowing. Many experts believe that, under consumer law, high charges could be justified if the latter were proved.
Q. What happens next?
A. With so much money involved, the banks are expected to fight the High Court's decision. The consumer group Which? estimates they make between £3bn and £4bn every year in charges, and were obliged to refund around £784m to almost 350,000 account holders last year alone. An appeal by the banks could go all the way to the House of Lords and continue well into next year.
Q. Can I reclaim bank charges now?
A. No, you will have to wait. The comparison website uSwitch.com estimates that more than one million claims, totalling more than £713m, have been on hold since July 2007. And from the start of the claims freeze to January 2008, the banks have made £20.5m in interest on this money. For the foreseeable future, while the legal wrangling continues, consumers waiting to reclaim what they see as unfair charges remain out of pocket.
If you feel you have paid too much in bank charges over the past six years but have not yet put in a claim against your account provider, you can still do so. However, the banks are highly unlikely to process such claims, as they continue to be covered by a waiver granted by the City regulator, the Financial Services Authority (FSA), at the time the High Court case started, allowing them to freeze the compensation process. This will probably not be lifted until there is a definitive ruling from the OFT on unauthorised overdraft charges.
Q. What could the OFT do?
A. Ultimately, it could order the banks to cut their fees and refund billions of pounds in previously imposed charges. How low it may set bank charges is anyone's guess but it is unlikely it will allow the current situation – where customers can pay around £30 a time for going into the red without prior approval – to continue.
Q. What could happen if the OFT orders banks to cut charges?
A. The banks could lose out on £3bn-£4bn a year should these charges eventually be ruled unfair and illegal. They will be keen to recoup those profits elsewhere. When missed-payment charges on credit cards were ruled unreasonable and capped at £12 a time by the OFT two years ago, the card companies significantly raised other charges to make up their losses. It is possible that the banks could do the same, for example by scrapping free personal banking. In other words, they may start charging a monthly fee for simply having a current account.