HIGH-STREET banks will finally appear in court tomorrow to defend “unfair” overdraft charges which cost customers billions of pounds a year.

Consumers could be in line for refunds of around £5 billion if the case, brought by the Office of Fair Trading, goes against the banks.

Eight institutions – Abbey, Barclays, Clydesdale, Halifax Bank of Scotland, HSBC, Lloyds TSB, Royal Bank of Scotland and Nationwide building society – have agreed to go to court after an OFT investigation last year questioned the legality of their unauthorised overdraft charges.

These are the fees levied by banks when customers go overdrawn without permission, exceed their agreed overdraft limits, have a cheque bounced or a direct debit or standing order declined because of a lack of funds.

The penalties can be as much as £39, and you can incur numerous charges if you exceed your overdraft for more than one day. In many cases people have been charged hundreds of pounds for slipping over the limit for just a few days.

The OFT decided that the charges were unlawful last year under consumer credit legislation, which states that while banks can levy penalty fees, they should cover only the administration costs involved. Banks are making an estimated £3.5 billion profit a year from the charges.

Following the launch of the OFT’s investigation into the issue, millions of consumers sought refunds from their banks. The consumer revolt is thought to have cost the industry around £1billion, with HSBC alone paying out £120m in refunds.

However, when the court case was announced last August, the Financial Services Authority (FSA), the City regulator, issued a waiver which meant that banks and building societies did not have to settle any more complaints until after the judicial ruling. The Financial Ombudsman Service has also stopped investigating claims for bank charges.

This decision has been widely criticised by consumer groups because while customers have had their cases put on hold, the banks are still levying the fees.

Martin Lewis at Moneysavingexpert said: “At the moment everything is working in the banks’ favour. The suspension of claims means they are not having to pay out any further refunds, yet they are still able to rake in huge amounts of money.”

A ruling from the court case is not expected until the end of April and if it finds in favour of the OFT, the banks are likely to appeal. Which?, the consumer group, believes that if this happens, people will have to wait until next year before the case is finally resolved and they find out whether they will receive their refunds.

In the meantime, consumers are being urged to continue submitting claims. The FSA’s waiver stipulates that banks should still assess claims made by people who are in financial hardship.

Anyone who has incurred charges as a result of a mistake made by their bank or building society should also have their complaint looked into now.

HOW WE GOT HERE

September 2006: The Office of Fair Trading (OFT) launched an investigation into the fairness of unauthorised overdraft charges.

May 2007: The OFT decided a more in-depth study was needed and announced a full-blown inquiry into bank charges. By this time, more than 1m consumers had written to their banks demanding refunds.

July 2007: The OFT and eight institutions agreed to go to court over the issue of whether bank charges were legal. The Financial Services Authority issued a waiver stating that banks and building societies did not have to deal with any more complaints. The waiver doesn’t apply to those in financial hardship or fees that were levied by mistake.

January 2008: The court case begins.