Court rules in favour of banks on fees

The landmark ruling, handed down by the highest 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 in London 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, boosting consumer protection, and left the door open for the OFT to assess the charges on other grounds.

"The key issue is in the last bit of the judgement where they say the OFT can assess the charges on other grounds," said consumer rights campaigner Martin Lewis. "I don't think this is over but we have just lost a significant battle."

NOT SUBJECT TO CONTROLS

The OFT said it was disappointed by the judgement and said it was considering whether or not to continue its investigation into unarranged overdraft charges. It will make an announcement on its decision in December.

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.

Banks, however, welcomed the decision. Lobby group the British Bankers' Association said it would work to bring a swift conclusion to outstanding customer complaints over the charges, which can be as high as 35 pounds.

Analysts estimated the cost of defeat for the banking industry would have been over 2 billion pounds in refunds and lost revenue from 54 million active current or checking 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 have been frozen by the FSA until January.

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 part of Lloyds -- and building society Nationwide.

These lenders represent an estimated 90 percent of Britain's current accounts market.

(Editing by Greg Mahlich and David Holmes)

($1 = 0.5979 pound)