Banks face bill for billions in ruling on fees

Published on Saturday 20 June 2009 14:46

THE long-running saga over alleged unfair bank charges begins its last chapter on Tuesday, and the outcome could prove another costly blow for the government, running into billions.

The highest civil court in the land, the House of Lords, will begin hearing the final pleas in the dispute between the Office of Fair Trading on one side and seven major banks and a building society on the other.

If the Law Lords uphold an earlier Appeal Court judgment against the banks, billions of pounds may need to be repaid to customers who were charged up to 38 a time for going a few pounds overdrawn.

The case has serious implications for the government, which finds itself in a unique dilemma – it effectively controls two of the seven banks, RBS and Lloyds, which are battling against a government department.

In 2003 the OFT began investigating fees charged to customers by credit card companies, saying the charges were excessive under a European Union- inspired law, the Unfair Terms in Consumer Contracts Regulations 1999.

Three years later, the OFT and the credit card companies came to a settlement and so-called "default" charges were capped at 12.

The following year the OFT tackled banks about current account charges, reported to be worth 2 billion profit per year to Britain's banks.

Since the OFT ruling could have been retrospective for up to six years, the banks faced potential payouts of billions in returned charges and interest.

Some banks did pay back customers who complained, with the total already repaid estimated at 500 million. But with banks and other financial institutions confused over the charges, it was agreed that the OFT would take a test case to the High Court to get a ruling on whether it was entitled to rule on the fairness of bank charges.

In the meantime, all complaints were frozen – figures released by the government show a million such complaints and 27,000 court cases since 2007 are awaiting the final ruling.

Legal observers say it will be a major surprise if the Law Lords overturn a unanimous Appeal Court ruling.

If they lose, the banks will have one final legal option – to go to the European Courts, which will prolong the issue for years and could pose a serious problem for the government.

A financial services industry source who has followed the case from the outset said: "If the OFT wins in the House of Lords, the Prime Minister and Chancellor will have to make a decision in their role as effective controller of two of the country's biggest banks, as well as Northern Rock. They can either force the nationalised banks to call off the case, which will cost the banks a colossal fortune, or they can allow the banks to fight on and go to a European court, a decision which no British minister could make without fierce opposition, not least from those people waiting on their default fees to be returned.

"With everything else that has been going on, this is the last thing Brown and Darling need, but it's a direct consequence of their decision to bail out the banks."

The cost of the case will also be a subject of debate. What was meant to be a short sharp hearing has dragged on for two years, and ten QCs, 14 barristers and seven companies of solicitors are listed for this week's hearing, with estimates of the legal costs so far put at 10m-20m.

A spokeswoman for the OFT said they hoped for a result "by the end of July".