The Office of Fair Trading (OFT) is gearing up for a new chapter in the battle over bank charges. The watchdog, which is taking seven major banks to court over penalty fees and charges on overdrafts, will file its response to the banks’ legal defences in the next few days.

The case is likely to be heard at the High Court in January next year. It could cost the banks billions of pounds if they lose.

If the Court finds that overdraft fees, which can be as high as £38 a day, are unfair, the banks could be forced to repay all fees and charges dating back six years. Banks and building societies are estimated to make around £1.7 billion a year from overdraft charges.

The banks claim that their charges are fair and that they contribute to the cost of administering current accounts. In it’s legal defence filed at the High Court, Abbey said: “The services provided by Abbey...are paid for by its customers by means of a combination of the service fees..the net interest earned by Abbey in respect of consumer deposits and the interest charged by Abbey on overdrafts.”

This has raised fears a defeat for the banks in the case could lead to the end of “free” banking. Earlier this year First Direct, the online arm of HSBC, introduced a £10 fee for customers who do not pay in at least £1,500 into their account each month.

The OFT says that overdraft charges are an unfair penalty for customers who exceed their overdraft limit. It is expected to reveal the charge it would deem to be fair and appropriate, sometimes called the ‘magic number’, before the case begins in January.

Hundreds of thousands of bank customers have already reclaimed bank charges directly from their bank or building societies. An estimated £200 million has been reclaimed so far this year. But in July, the Financial Services Authority gave banks a reprieve from repaying charges until the court case is decided.

The institutions engaged in the court case are HBOS, Abbey, Barclays, Lloyds TSB, Clydesdale and Yorkshire Banks, Royal Bank of Scotland and Nationwide Building Society.