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Judgment gives OFT authority to regulate on bank charges

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The freedom of banks to charge heavy fees on unauthorised overdrafts could soon be at an end after the High Court ruled that the Office of Fair Trading (OFT) has jurisdiction to investigate the charges.

As part of a test case brought by the OFT, the Court of Appeal decided that the charges levied by banks for unauthorised overdrafts and bounced cheques are subject to regulation under the Unfair Terms in Consumer Contracts regulation of 1999.

The banks had disputed the right of the OFT to impose a legal maximum on the charges, arguing that they are legitimate remuneration for goods and services supplied.

With thousands of claims for refunds from customers currently frozen in the county courts pending a final judgment, the banks could be faced with reimbursing £1 billion in charges and with the loss of £2.6 billion in annual income.

Banks have been charging up to £35 for a bounced payment made by customers who have broken the agreed limit of their overdraft, even though critics claim that the actual cost incurred by the banks could be as little as £2.

A number of banks and building societies have already amended the rate at which they charge for unauthorised overdrafts, but fees above £12 – the maximum default charge set by the OFT on credit cards – are still common.

It is thought the OFT may move to introduce the £12 default credit card charge to the current account market.

In their judgment, the Master of the Rolls, Sir Anthony Clarke, and Lord Justices Waller and Lloyd said that fees for unauthorised overdrafts were not part of the “core or essential” bargain between banks and customers and that an assessment of fairness was not precluded by the regulations.

The banks were refused leave to appeal to the House of Lords but they may approach the law lords directly for permission to lodge a final appeal.

In the meantime, the Court of Appeal ruling advised that cases for reimbursement brought by customers should remain on hold in the county courts until the banks have decided whether they wish to launch a last appeal.

The OFT said: “This judgment confirms the OFT’s long-held interpretation of this important aspect of consumer law, and is one that consumers themselves would identify with. It is also relevant to businesses across the whole economy.

“The judgment means we can go forward and we are now looking to go back to the banks to say whether we think the charges are fair.”