David Prosser: The customers are in the right

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The banks may have won this battle but they cannot win the war. The Supreme Court ruling is a blow to the campaign to secure refunds for those who have paid excessive unauthorised borrowing charges, but it was a technical adjudication on the powers of the Office of Fair Trading, not a judgment on whether the banks' fees were fair or legal.

On this more fundamental question, there is no argument. One of the basic tenets of law is that when one party breaches a contract, the other party is entitled to reclaim their costs but no more. In the banking context, customers who breach their overdraft limit should be charged a fee reflecting the costs incurred by their bank as a result. But the bank isn't entitled to make a profit on this fee.

That's what happened for many years. Banks routinely charged £35 each time customers borrowed too much or bounced a cheque, even though the cost of dealing with each of these cases was a fraction of that figure.

But don't take my word for it that the banks are in the wrong. They have admitted as much themselves.

Why did Britain's banks pay out £560m in compensation to thousands of customers who complained about these charges before all subsequent cases were put on hold during the OFT test case? Because they were desperate to settle every single case before a customer took them to court to establish a legal precedent that the level of fees being charged was illegal.

Why has every single bank now reduced unauthorised borrowing charges to a level that reflects much more accurately the true costs of dealing with these breaches? Because the banking industry knew it had been caught out in trying to levy fees that were illegally high.

And why did the banks not complain when the OFT ruled their credit card divisions could charge fees of no more than £12 if borrowers exceeded their credit limits on these accounts? Because they knew they had no legal justification for arguing the case.

Many people worry about what will happen if banks are forced to spend billions on compensating those they have overcharged and give up the £2.6bn annual revenue that these fees produce. It's true that the free-banking model we have in Britain is likely to be eroded (though in truth this is already happening), an unhappy result for all those bank customers who have always stayed within the limits of their accounts.

That, however, is a different issue. While the model may have worked in the favour of some customers, we cannot allow the banks to get away with years of having routinely charged millions of people illegally high fees. Nor will we. As soon as a court gets to rule on the legality of these fees – rather than the technicalities of the OFT's remit – yesterday's setback will be reversed.

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