LONDON Banks won a two-year court battle over overdraft charges on Wednesday, dealing a blow to hundreds of thousands of customers seeking to claim back billions of pounds which they say were levied unfairly.
The landmark ruling, handed down by the Supreme Court, found the country's consumer watchdog the Office of Fair Trading (OFT) cannot use customer protection rules to investigate whether the fees were unfair.
"Today's decision is a hammer blow to the OFT and signals the end of the road when it comes to investigating bank charges on behalf of the public," Mathew Rea, head of litigation at law firm Dawsons said.
"Consumers now have the option to pursue individual claims against the bank but this would be extremely costly and time consuming."
The surprise judgement came after seven lenders appealed in June against an earlier ruling by the Court of Appeal, which said fees for unauthorised overdrafts fell under the scope of consumer contract law and can be assessed for fairness on those grounds by the OFT.
Overturning that ruling, the Supreme Court said the charges imposed by banks formed part of their fees for current account services and could not be assessed for fairness under the Unfair Terms in Consumer Contracts Regulations.
But the court said parliament may wish to consider the matter, by boosting consumer protection, and left the door open for the OFT to assess the charges on other grounds.
Prime Minister Gordon Brown said after the ruling that bailed-out banks Northern Rock, Lloyds and Royal Bank of Scotland had already reviewed their charges.
"It is right we examine how there can be fairness in all cases to people who are banking customers in this country," he said, adding new legislation including rules allowing class action lawsuits would make it easier for banks to be challenged.
LOSING THE BATTLE?
The OFT said it was disappointed by the judgement and was now considering whether or not to continue its investigation into unarranged overdraft charges. It will make an announcement on its decision in December.
Consumer rights campaigners -- who say customers have already benefited from banks reviewing charges as a result of the drawn-out case -- say the OFT should pursue the probe.
"The key issue is in the last bit of the judgement where they say the OFT can assess the charges on other grounds," campaigner Martin Lewis said outside the court. "I don't think this is over, but we have just lost a significant battle."
The OFT's 2008 market study found banks earn around a third of their retail revenues from unarranged overdraft charges which it said were not subject to effective consumer controls.
An earlier study found the banks benefited in 2006 from 2.6 billion pounds in charges associated with unauthorised overdrafts and questioned whether they are linked to banks' administrative costs.
Lawyers said there could be a further OFT probe, but added that basing an investigation on the murky grounds of "imbalance" between banks and their customers would prove difficult.
"The OFT have spent the last couple of years looking at fairness on the basis of the price of the charges," solicitor Robert Allen, acting for Barclays in the case, said.
"Even if they did decide to assess the charges on another basis, they have a lot of work to do because all of their work to date has been purely based on the level of the fees."
Britain's largest banks welcomed Wednesday's decision.
The British Bankers' Association industry lobby group said it would work to bring a swift conclusion to outstanding complaints over the charges, which can be as high as 35 pounds per breach.
Analysts estimated the cost of defeat for the banking industry would have been over 2 billion pounds in refunds and lost revenue from Britain's 54 million active current accounts.
Around 12 million people regularly incur unauthorised overdrafts, effectively subsidising a "free if in credit" system for millions of others who do not regularly slip into the red.
The two-year court battle was designed to clarify the law after growing numbers of customers said the fees were unfair and took advantage of an uncertain legal status to demand refunds.
Tens of thousands of Britons claimed back up to six years of penalty fees when the issue first came to light in 2005, spurred by templates on Internet sites, high profile media coverage and anecdotal evidence that banks would repay charges in full.
Refunds had been frozen by the FSA until January, but the waiver was lifted on Wednesday. Simmons & Simmons' Allen, however, said consumer complaints and county court cases were also unlikely to be upheld after Wednesday's ruling.
The case involves HSBC, Lloyds Banking Group, Abbey (now owned by Spain's Santander), Royal Bank of Scotland, Barclays, Clydesdale (part of National Australia Bank), HBOS -- now owned by Lloyds -- and building society Nationwide.
These lenders represent an estimated 90 percent of Britain's current accounts market.