Millions of consumers' hopes of reclaiming unauthorised overdraft charges were dashed today when the banks won a surprise victory in the Supreme Court.
The UK's highest court ruled the charges do not come under "unfair contract" rules, meaning they are not subject to regulation by the Office of Fair Trading.
The ruling, which was described as a "bitter blow" for customers, who will not now be able to reclaim money they had paid out in the charges, ends a test case on the issue started more than two years ago.
More than one million claims have been put on hold since the case was launched in 2007, while a further eight million people are estimated to have paid the charges since July 2001, but not yet submitted a claim to get their money back.
Which? chief executive Peter Vicary-Smith said: "This is a bitter blow for the millions of people who have been patiently waiting to get their bank charges back.
"Not only does it give banks licence to charge what they like for unauthorised overdrafts, but it could have ramifications for other areas of personal finance.
"The banks now have no excuse for introducing other fee charges."
But the ruling was better news for consumers who do not breach their overdraft limit or go into the red without permission, as it was feared a verdict against the banks would have heralded the end of free banking in the UK.
Unauthorised overdraft charges generate around £2.6bn of revenue a year for banks.
Industry commentators had warned that if the banks lost this lucrative income stream they would look for other ways to recoup it, such as through imposing a flat monthly fee on current account customers or charging for every transaction people carried out.
The Supreme Court also offered a glimmer of hope to consumer groups, saying that although unauthorised overdraft charges do not come under the "unfair contract" rules, the OFT may be able to assess them under other criteria.
The OFT said it was now considering the details of the judgment before it made a decision on whether or not to continue its investigation into the charges. It plans to make a statement on the issue next month.
Martin Lewis, creator of MoneySavingExpert.com, said: "It wasn't a loss, the OFT fought on the wrong clause.
"The initial shock reaction by the crowd in the court, thinking that the banks had won, obscured what was perhaps the most important part of the judge's final statement, that the OFT may be able to look at fairness by another route."
Meanwhile, the Government said it was "determined" to ensure the system of unauthorised overdraft charges was made fairer for consumers in the future.
Sarah McCarthy-Fry, Exchequer Secretary to the Treasury, said: "The Government will work with the OFT and FSA to reach a new framework for fairer bank charges going forward."
She said it would try to reach a voluntary agreement with the banks, but warned that the Government would "take action" if this did not work.
Customers who go into unauthorised overdraft or breach their agreed limit can be charged as much as £35 or more for a single bounced payment. Campaigners claim the actual cost to the banks could be as little as £2.50.
But many of the high street banks had already changed the structure of the fees they charge people who go into the red, with or without permission, before today's ruling.
Prior to refund claims being frozen, some banks had already paid out more than £559 million to customers who complained about the charges.
Consumers who have already received refunds will not have to repay them as a result of today's ruling.
The test case was brought jointly by the OFT and Abbey, Barclays, Clydesdale, Halifax Bank of Scotland and Lloyds TSB, which are now part of the same group, HSBC, Royal Bank of Scotland Group and Nationwide Building Society.
Welcoming today's ruling, Angela Knight, chief executive of the British Bankers' Association, said: "The thing that is important about today's outcome is that there is clarity now in the law."
She added: "The banks do recognise the concerns of their customers and the wider concerns that have been raised by this case on unauthorised overdraft charges and we want to sort out this issue."Reuse content