Banks began their courtroom battle to carry on charging customers “rip-off” penalties for going into the red by insisting yesterday that fairness rules do not apply to them. The future of free banking in Britain may rest on a High Court judge’s decision on whether charges imposed on account holders for unauthorised overdrafts are legal.

Banks impose penalties of up to £40 on customers for bouncing cheques or exceeding overdraft limits. But the real cost to the banks may be as little as £2.50 and they make £10 million a day from the practice.

Rebellious consumers sang outside the court building as the Office of Fair Trading (OFT), seven banks and a building society squared up for a test case that could result in billions of pounds of refunds. Banks may be forced to reduce future fines to a level set by the regulator.

Lawyers acting for Royal Bank of Scotland opened the case by blaming the OFT for provoking a customer rebellion that has meant that thousands of objectors have claimed back hundreds of pounds each.

Laurence Rabinowitz, QC, told the judge, Mr Justice Andrew Smith, that a deluge of claims began after the OFT suggested a rule restricting credit card charges to a maximum £12 could also apply to current accounts.

The comment was unfortunate because it was made before the OFT had even begun its continuing investigation into current account overdraft charges. It became obvious that, “a hornet’s nest having been stirred”, the matter should go to court for a decision on the issues, said Mr Rabinowitz.

He argued that the Unfair Terms in Consumer Contracts Regulations, introduced in 1999, do not apply to overdraft charges because they do not constitute payment for a service.

The banks argue that customers, when they open an account, agree to overdraft conditions including charges levied as part of the price for an integrated package of services. They deny accusations that the conditions are not stated in intelligible language. Mr Rabinowitz said the language used was plain, straightforward, avoided jargon and was easy to understand.

If the OFT wins, some banking experts forecast the end of free current accounts as banks attempt to recoup their losses. It could also lead to disappointment for about 50,000 consumers whose claims have been put on ice. Until now, banks have been routinely returning the full amount of a claim back to customers.

If the banks lose in the High Court, they may only have to refund the difference between the charges they imposed and a new acceptable rate of penalties set by the regulator.

The OFT is being fought by Abbey, Barclays, Clydesdale, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland/ NatWest and Nationwide Building Society. The case has been jointly brought in an attempt to get the courts to resolve the bitter issue. The banks have assembled about 80 lawyers and are estimated to have spent £1 million each already. The OFT will be represented by Brian Doctor, QC.

Oystar, the pop group, whose antibank charge protest single I Fought the Lloyds reached No 25 in the charts, performed to pedestrians outside the courtroom. The case continues. Angela Barratt, 28, from Manchester, reclaimed £5,800 from HSBC after reading an item on MoneySaving Expert.com. She said: “I had to write two letters and start court proceedings before they paid up. I got a letter through from their solicitors saying they would like a copy of my statements. As soon as I faxed that across to them I got an offer through the post.”

She used the money to put down a deposit for a Disney family holiday and repaid some debts. She has also helped relatives to claim a total of more than £10,000 in unauthorised overdraft charges from different banks.

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