Leading article: A victory for common sense – and for customers

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A crucial battle has been won in the campaign for fair bank charges, and now it is surely only a matter of time before final victory in the war itself arrives. A High Court judge, Mr Justice Andrew Smith, ruled yesterday that the Office of Fair Trading can apply the 1999 Unfair Terms in Consumer Contracts Regulations to decide if unauthorised overdraft charges levied by the banks are fair or not.

The judge was careful to note that his judgment does not necessarily mean the charges levied by banks are indeed unfair. And he rejected the OFT's argument that the banks' terms and conditions regarding overdraft charges were not written in sufficiently plain English. But his decision to give the OFT jurisdiction is the key. The OFT has already strongly hinted that it believes the charges banks levy for unauthorised overdraft borrowing are unjustified. Indeed, this was the reason it brought this test case against seven major British banks last July.

The arguments have been complex but the principle at stake here is simple enough. It comes down to the difference between a fee for a service and a penalty charge. The 1999 law allows the banks to charge customers only the administrative cost of dealing with unauthorised overdrafts. Yet the sums the banks have been levying on customers have been well in excess of this administrative cost. Though it costs the banks only £2 to process a bounced cheque, they have been charging up to £40 a time. There will now need to be a further court hearing in which a judge will be asked to decide what a fair charge would be.

Banks have already refunded £784m to about 378,000 customers in the past two years, while admitting no legal guilt. Thanks to this verdict, many thousands more look likely to be refunded for charges levied over the past seven years. According to some estimates, bank customers could be in line to receive as much as £10bn in refunds. At the very least, the banks look likely to be forced to bring their charges down dramatically in future. This is what happened when the OFT ruled that the penalty charges levied by credit card issuers for the late payment of credit card bills were excessive.

Of course, the banks might attempt to appeal against yesterday's ruling, stringing out the legal process. These charges have been a nice little earner for the lenders, raking in £3.5bn a year. They may well decide that it makes financial sense to continue collecting the charges and delaying the day of reckoning. For the sake of their reputations, the banks should pay up now instead.

And then there is the backlash for the ordinary customer. In the past, the banks have hinted that they might abandon their long-standing policy of so-called "free banking" if they are not allowed to levy such charges. The spectre of regular charges for current account holders has been invoked. Yet the banks should think twice before repeating such threats in the present climate. Financial institutions are hardly flavour of the month at the moment, either with regulators or with their customers. This week has seen the unveiling of plans to saddle the taxpayer with responsibility for billions in questionable loans made by the large banks, the same institutions on the wrong side of yesterday's judgment. And throughout the recent turbulence in financial markets, the major British banks have been paying out record dividends to their shareholders and bonuses to their executives.

Humility, rather than belligerence, would be an appropriate response to this ruling. Britain's banks would be well advised to swallow this defeat with good grace and instead focus their energies on giving their customers a fair and honest service.

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