Q&A: what is the OFT doing to ensure fairness in bank charges and how does the test case fit in?

High street banks have assembled a dream team of top-ranked QCs to fight a test case this week that could determine the future of retail bank fees.

The Office of Fair Trading will argue in the High Court that fees levied by seven banks and one building society against customers who exceeded overdraft limits were illegal under contract regulations introduced in 1999.

The case, which starts on Wednesday and could end as the biggest commercial case in 20 years, will affect tens of thousands of claims before the county courts that have been stayed pending the outcome. It is estimated that the banks have paid up to £1 billion in total to settle out of court claims from individual customers, but they stand to lose billions more if they are defeated in court.

Losing could force the banks to change their business model, since the retail fees generate profits of £10 million a day, according to OFT estimates. However, defeat for the banks could also be bad news for consumers, because it would almost certainly mean the end of “free” current accounts.

One lawyer close to the case said: “If the banks lose this case, the whole free-banking model will disappear.”

Banks use unauthorised-overdraft charges to subsidise what they say are unprofitable services such as cheques, free cash withdrawals and free day-to-day accounts.

Julian Skan, a senior executive in the retail banking practice at Accenture, said: “If the banks are forced to reduce their charges for unauthorised overdrafts, then prices may well go up elsewhere. This risks increased charges for people who remain in credit and possibly the withdrawal of banking services from unprofitable poorer customers.”

The defendants - Abbey, Barclays, Clydesdale, HSBC, HBOS, Lloyds TSB, Royal Bank of Scotland and the Nationwide building society – have lined up some of the City’s biggest law firms and leading Queen’s Counsel to represent them.

Legal sources estimate that the banks have each spent at least £1 million on the case on pretrial costs. Members of the Queen’s Counsel acting for the banks include Ali Malek, Iain Milligan, Laurence Rabinowitz and Geoffrey Vos, who until recently was the chairman of the Bar Council. Leading commercial silks charge up to £1,000 an hour.

In contrast, the OFT will be represented by only one Queen’s Counsel, Brian Doctor, who will be assisted by three junior barristers.

The large number of lawyers and intense media interest has forced the court to take the unusual step of moving proceedings from the Royal Courts of Justice to a larger venue, the International Dispute Resolution Centre, on Fleet Street.

The first part of the case will consider whether the Unfair Terms in Consumer Contracts Regulations 1999, a set of rules governing contracts between individuals and businesses, apply to the unauthorised overdraft charges. It is the first time that the regulations have been seriously tested in relation to the banking industry.

The OFT must convince the judge that the regulations apply; it will then have to prove at another hearing, probably later in the year, that they are unfair. If the court agrees with the banks that the charges do not fall under the scope of the regulations, the case will fall at the first hurdle.

The first hearing is expected to last eight days, with a judgment before Easter. However, given its public importance, the case is likely to go all the way to the House of Lords regardless of which side wins this round.

The last case that involved such a dazzling lineup of prominent lawyers was the so-called International Tin Council dispute in 1988, which involved 22 countries. The law firms that have been instructed by the banks are: Addleshaw Goddard, Allen & Overy, Ashurst, Freshfields Bruckhaus Deringer, Linklaters, Lovells, Simmons & Simmons, and Slaughter and May.

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