The Supreme Court will hand down a judgement on Wednesday that could lead to billions of pounds being refunded to millions of bank customers.
A Supreme Court judgement has struck a major blow to the hopes of millions of bank customers seeking billions of pounds of overdraft charge refunds.
Lord Phillips will reveal the Court's decision on an appeal by seven banks and the Nationwide building society.
The court has overturned earlier court rulings that allowed the Office of Fair Trading to investigate the fairness of charges for unauthorised overdrafts.
They want to stop the Office of Fair Trading using consumer protection rules to investigate the fairness of their charges for unauthorised overdrafts.
The decision follows more than two years of test case litigation.
The decision follows more than two years of test case litigation.
So far the banks have lost at both the High Court and Appeal Court stages of the test case.
At stake is an estimated £2.6bn of annual income for the banks, which had appealed against earlier rulings.
Both of those courts agreed with the OFT that it has the power, under the Unfair Terms in Consumer Contracts Regulations (UTCCR), to scrutinise the fairness of overdraft fees.
Seven banks and one building society wanted the court to overturn two previous rulings that would let the OFT investigate their overdraft fees.
But the banks have refused to give in, as about £2.6bn of annual income is at stake.
In a three-day appeal in the House of Lords in June, the banks argued they would receive a "deluge of litigation" if the decision was made against them.
THE STORY SO FAR... More than a million people have claimed for the return of their unauthorised overdraft charges but their cases are on holdIf the banks win their latest appeal, these people are unlikely to get any money backIf the banks lose, then the legal arguments should move on to the next stage - a case to determine whether these charges were fair or notOnly then will people have a clearer picture as to whether billions of pounds will be handed back to customers
Historic claims
At the House of Lords appeal during the summer, the decision on which is now being handed down, the banks argued that the legislation simply does not give the OFT the powers it thinks it has.
All new claims against banks were effectively suspended in July 2007 when the OFT and the banks agreed to stage the test case to see if the overdraft charges were legal or not.
OFT victory?
The OFT has previously said that even if it lost, it would still try to use other powers, perhaps by instigating a full competition commission enquiry, to attack overdraft fees.
If the OFT wins then it will open the door for it to announce that overdraft charges are indeed unfair, when it reveals the result of its parallel investigation into them soon.
The Supreme Court's president Lord Phillips said that bank customers agreed to pay overdraft charges as part of the price of having a current account, so they fell outside the scope of the appropriate regulations.
In theory that should trigger an automatic refund of all banks charges that have been levied since July 2001.
But Lord Phillips added that this was not the end of the matter as the OFT could still try to scrutinise bank charges under other parts of the regulations.
Some campaigners have argued that any refunds should stretch back even further, to the start of 1995, when the UTCCR regulations first entered UK law.
"This will not close the door on the OFT's investigations and may well not resolve the myriad cases that are currently stayed [put on hold] in which customers have challenged the relevant charges," he told the court.
The banks, OFT, judiciary and the Financial Services Authority (FSA) agreed the test case procedure to resolve these legal issues in July 2007.
But that agreement also envisaged a further round of legal hearings in the High Court.
This would decide if the OFT was right to say bank charges had been unfair in the past, and would decide exactly what level of charges might be fair in the future.
The government is fearful that this second stage of litigation could last until 2015, and over the summer called publicly for both sides to come up with a much quicker way of resolving the issue.
The government is now the leading shareholders in Lloyds Banking Group, and RBS, which owns Nat-West.
It may be able to exert pressure on the banks to cut a deal with the OFT and not to take up their right to have all issues of fairness decided by another long drawn out series of court hearings.
Bank victory?
If the banks were to win their appeal, it would completely undermine the efforts of the OFT for the past three years.
Whether it is fair or not, we may have to come to terms with having to pay for our banking, but if we do there will be increased expectations on levels of service and quality of product Andrew Hagger, Moneynet
It would also be a crushing defeat for the attempts of campaign groups and media organisations which have encouraged people to launch refund claims in the county courts.
The OFT has claimed that even if it loses, it will still try to use other powers, perhaps by instigating a full competition commission enquiry, to attack overdraft fees.
But a loss in the Supreme Court would amount to the second significant legal defeat for the OFT.
At the High Court it was told that bank charges could not, as was once widely claimed, be regarded as unfair penalties under common law.
The losing side, whoever it turn out to be, could in theory try to take the issue to the European Court of Justice
However such a route of appeal is not automatic.
The Supreme Court is the gate keeper for such appeals and can only authorise one if there is an area of uncertainty about legislation derived, like the UTCCR, from European law.
At the House of Lords hearing neither the OFT nor the banks expressed any enthusiasm for a European appeal as it would string out the test case by at least another year.
Monthly fees
The test case has led to the freezing of more than one million claims by bank customers for the return of their fees, with their claims being put on hold either at the banks, in the court system, or at the Financial Ombudsman Service.
An OFT victory would lead to pressure for the stay on those cases to be lifted.
Any organised refund would affect all bank account holders who have paid overdraft fees in the past few years, not just those who have chosen so far to demand one.
A consequence of the OFT winning at the Supreme Court is that it would probably lead to demands from the OFT for banks to change the way they levy overdraft fees in the future.
The banks may be told to slash them to a level much closer to the maximum £12 a time levied by credit cards companies on defaulting customers.
This could lead in turn to a return to the old system of monthly or annual bank account charges, even for customers who stay in credit, as the banks seek to recoup any lost revenue.
"Whether it is fair or not, we may have to come to terms with having to pay for our banking, but if we do there will be increased expectations on levels of service and quality of products," said Andrew Hagger, of Moneynet.
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