High street banks today began the latest round of a legal fight that threatens an overhaul of their retail charges at a cost of billions of pounds.

Eight lenders responsible for the majority of the UK’s current accounts, including Barclays, HSBC, Lloyds TSB and the Royal Bank of Scotland, face a challenge by the Office of Fair Trading (OFT), the consumer watchdog, to their practice of imposing fees for processing transactions when customers have insufficient funds.

The OFT, as part of a wider review of current accounts, is seeking a court ruling that the unauthorised overdraft charges are unlawful under consumer regulations introduced in 1999. It estimates that the banks earn £2.6 billion a year from the charges.

This hearing, expected to last six days, is the latest stage in what is set to be a costly and protracted legal battle. In April, the OFT won the first stage after the High Court rejected the banks’ claim that the regulations did not apply. Today the banks asked the Court of Appeal to overturn that decision.

Consumers face a long wait before they will know if they are entitled to a refund as the courts will not consider the fairness of the charges until the preliminary issues are resolved. Around 50,000 claims in the county courts have been stayed pending the outcome.

Although the furore over the charges has been overshadowed by the banks’ recent financial troubles, the stakes in the case remain high. The banks had paid out almost £1 billion before a freeze on claims was imposed and they stand to lose billions more if the OFT’s action succeeds.

If the court sides with the watchdog, it could force the banks to limit or scrap the charges altogether — that, some predict, will lead to an end to free current accounts.

Speaking on behalf of the lenders, the British Bankers’ Association yesterday said the banks would continue to fight for their right to impose the charges. “The banks are appealing on this issue as they continue to believe that the fairness test of the [regulations] does not apply to these type of charges.”

The banks have been given permission by the Financial Services Authority, the financial watchdog, to continue applying the charges until the case is resolved.

In July, the OFT published a study into the market for current accounts, which expressed concern that many customers were unaware that the charges existed. It found that 12.6 million accounts — 23 per cent of the active total — had been subjected to such charges, while more than 1 million customers had amassed charges of £500 or more.

The charges increased an average of 17 per cent between 2003 and 2007, the study found.

In August, the watchdog wrote to the banks to open discussions that it intends will run parallel to the court case. Yesterday it said: “Alongside of [the test case], we continue to progress our investigation as quickly as possible and are in ongoing discussion with the banks about our provisional view on the issue of fairness.”

The lenders involved in the case are: Abbey, Barclays, Clydesdale, HBOS, HSBC, Lloyds TSB, Nationwide and the Royal Bank of Scotland.

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