Millions of bank customers hoping to be refunded their overdraft charges were dealt a surprise blow today when the supreme court handed high street banks a landmark victory over the Office of Fair Trading.
The ruling, which concluded a series of trials and appeals lasting two years, determined that the OFT could not challenge overdraft charges because it does not have the power to decide whether unauthorised charges are fair.
The case was brought between the OFT and seven banks and one building society in reaction to the increasing number of current account customers trying to reclaim unauthorised overdraft fees paid since 2001. Thousands of claimants were successful in getting their money back through out of court settlements, but when the case was launched in July 2007 the City regulator the Financial Services Authority placed a moratorium on the handling of claims until the case's conclusion.
More than 1.2 million claimants had lodged complaints with their banks, hoping to get more than £2bn in returned fees, based on the average successful claim of £1,700, according to the Consumer Action Group. But although the FSA has now lifted the moratorium, giving the banks eight weeks to deal with claims, today's ruling means that only those who are suffering extreme financial difficulties are likely to get any money.
Lloyds, one of the banking groups partly owned by the taxpayer following last year's bank bailout, said it would judge each claim on an individual basis, but unless claimants were suffering financial hardship they were unlikely to be successful.
Abbey also confirmed it would be judging claims on the same basis, and added that it was still worthwhile customers lodging a claim if they were suffering financial hardship.
Of the 10,000 claimants who took their complaints to the financial ombudsman after being rejected by their banks, about half were deemed to be suffering particular financial hardship.
Thousands of county court claims had also been put on hold while the case progressed, but Marc Thorley, commercial litigation partner at law firm Simmons & Simmons thinks that most will now be rejected because people have brought them on the basis of the charges either being penal or unfair – both of which stances have been rejected by the supreme court.
The British Bankers' Association welcomed the ruling for bringing clarity to the position of claimants and banks. However, Eric Leenders, executive director of retail, said the court had left open the option for the OFT to challenge unauthorised overdraft fees in court again, if it could find alternative legislation through which to do it.
Lawyers for one of the banks involved have already indicated they felt the OFT had pursued the wrong case, and that it could have succeeded if it had challenged the banks on the grounds of anti-competitiveness, because the fees for all the banks were very similar.
Martin Lewis of MoneySavingExpert.com said: "It wasn't a loss, the OFT fought on the wrong clause. The initial shock reaction by the crowd in the court, thinking that the banks had won, obscured what was perhaps the most important part of the judge's final statement, that 'the OFT may be able to look at fairness by another route'.
"The fact that this was deemed important enough to be said in his very short verbal statement is of great significance. After analysis of the report it reveals the court's coded message to the OFT was 'you took this case on too narrow a legal basis'."
He pointed out that while the case had centred on fees not being "disproportionately higher than the cost to the company", it could have focused on a simpler clause of the legislation. Under that clause he said the OFT could argue that, as people's contracts with the banks were not negotiated individually, they must be in good faith, and should not cause a significant imbalance to the detriment of the consumer.
The OFT said it was disappointed by the judgment, which overturned previous high court and court of appeal rulings that unauthorised borrowing terms could be assessed for fairness. It will now look at the detail of the judgment before deciding whether to continue with its investigation into unauthorised overdraft charges, and will make a further announcement in December.
Lewis added that although this case had failed in court, the cause was now becoming political.
"I think we are moving from a judicial to a political plane," he said.
"Sources have told me that the prime minister was taking an interest in today's judgment and I have received letters from David Cameron and Nick Clegg … there are 1.2m claims on hold and 8 million people who have paid charges and not claimed. This is not a small niche financial issue, this is a political issue now. Imagine being the party who promised to sort this out."
