A landmark court ruling against high street banks this week could hand eight million bank customers windfalls worth billions of pounds.
On Wednesday, the Supreme Court will announce whether it agrees with the Office of Fair Trading that unauthorised overdraft fees are subject to laws on unfair contracts. If the group of banks fighting the test case lose, they face a flood of claims from customers who have paid overdraft fees during the past eight-and-a-half years, but if the OFT loses the two-year court battle for refunds of charges will be lost.
Today the consumer group Which? claims the banks could face huge claims for refunds on the basis of an opinion poll that found 63 per cent of people charged the fees have not asked for their money back. That suggests that eight of the 12 million people charged fees since July 2001, the earliest period for which claims may be made, being six years before the launch of the current case, could claim refunds.
In addition, one million claims for refunds are on hold in the courts and internally in banks pending the outcome of the test case as a result of a "waiver" agreed with the financial institutions involved: Abbey, Barclays, Clydesdale, HSBC, Lloyds, RBS and the Nationwide Building Society.
Which? estimated that payouts could range from "several billion pounds" to £22bn, the maximum thought to have been charged in the eight year period, on the basis of the OFT's estimate last year that financial providers made £2.6bn from overdraft fees in 2006.
However, the amount paid out will hinge on whether politicians force the banks to refund all customers automatically, and whether banks refund the entire amount or the difference between what the OFT deems a fair charge and what was charged. Nonetheless, the payouts could be substantial, both for current account customers struggling in the recession and for banks rebuilding battered balance sheets.
Customers who won their cases against the courts before the OFT launched the test case in July 2007 were receiving compensation running into thousands of pounds. Then, the banks settled cases rather than allow a court to set a legal precedent on whether fees of up to £38 a time were excessive under the 1999 Unfair Terms in Consumer Contracts Regulations.
But as the number of cases against them massed, buoyed by The Independent's campaign against excessive charges, the banks changed their minds and sought a definitive legal opinion.
After defeats in the High Court and the Court of Appeal, the banks appealed to the House of Lords (whose legal powers have been transferred to the new Supreme Court), where the case was heard for three days in June. According to the OFT, the banks will not be able to appeal the case to Europe if they lose, unless the Supreme Court refers the proceedings itself, which is thought to be unlikely. But even if the OFT wins its argument that the charges are subject to fairness laws, it will have to determine what level of charges would be fair – which may itself be the subject of legal challenge.
Which? personal finance campaigner Phil Jones said: "If the Supreme Court rules against them, the banks could find themselves staring down the barrel at millions of fresh claims. This is in addition to the huge backlog that's already built up since the waiver was put in place.
"With so much money at stake, the banks may drag the process out... so we'd warn people not to make any plans for their refunded cash just yet."
Visit the Which? banking campaign site at www.bnbb.org
Unfair charges What happens next?
By James Moore, Deputy Business Editor
Scenario 1 : The Supreme Court reverses the decisions of two lower courts and says the OFT has no power to investigate overdraft charges. Seen as unlikely, but the nuclear option campaigners fear. While it doesn't stop consumers pursuing banks through the courts, it does make their lives much more difficult. It would also raise questions about the OFT's ability to do its job. Pressure may build on this, or a future Government, to address the issue. Seen as unlikely.
Scenario 2: The Supreme Court upholds the decision and the banks seek a deal. While this case is only looking at whether the OFT can decide whether or not the charges are unfair, it has already issued a preliminary finding that they are not fair. A final adjudication would follow with the OFT perhaps setting a "fair rate" for charges. If the banks sought a deal, a refund scheme would probably be put in place, but there would likely be considerable horse trading. There won't be a Christmas windfall, and some may be left dissatisfied because there will inevitably be an element of compromise. Still, money could start trickling through next year. Possible, if banks see this as in their best interests.
Scenario 3: The Supreme Court upholds a decision but the banks fight on. Even if the OFT confirms its ruling that charges are unfair, the banks could look at Europe and could also still seek to challenge the OFT's ruling. Banks which have been bailed out could face political pressure not to go down this route but they could argue that they are too weak to pay up given the financial crisis or that a compensating people would prevent them from offering mortgages or loans to small businesses Very possible. The banks are likely to see it as in their interests to drag this out, and they have long insisted that because this only affects unauthorised overdrafts (as opposed to those that have been agreed) then they should be able to charge what they want.