Britain's biggest banks today lost a landmark test case at the High Court over unauthorised overdraft charges.

The case went to the High Court to decide if the Office of Fair Trading (OFT) had the power to decide whether it was unfair that banks charge borrowers fees of up to £39 for exceeding overdrafts. Seven banks and one building society jointly brought the case.

Mr Justice Andrew Smith ruled in favour of the OFT, stating that it can apply consumer contract regulations to decide if bank overdraft charges are fair or not.

In summing up, Judge Smith said: “I reject the banks’ contention that the Relevant Terms (the bank terms being challenged by the OFT) are exempt from assessment as to fairness under the 1999 Regulations.”

But he continued: “This does not mean that the Relevant Terms are necessarily to be regarded as unfair or that they are not binding on consumers under the Regulations.

“Those are not questions for me to decide in this judgment.”

The ruling gives the OFT the green light to decide whether the charges are unfair and, if so, what a fair fee should be.

The banks, however, are expected to appeal, delaying an investigation and holding up the cases of thousands of claimants.

Since the beginning of 2006 hundreds of thousands of bank customers have tried to reclaim their charges on the grounds that they were too high and unfair. UK banks have paid an estimated £784 million in out-of-court settlements to customers who have reclaimed up to six years' worth of overdraft charges.

However, last July the Financial Services Authority (FSA) gave the banks permission to suspend refunds until the test case is completed. Claims will remain on ice for the near future. Thousands more cases launched in the county courts or with the Financial Ombudsman Service will also remain on hold.

A spokesman for the FSA says: "The waiver will continue for the time being. When we granted it it we said it would run for 12 months or until the test case was resolved, whichever was sooner. The test case is not yet resolved as the parties could still decide to appeal."

The banks have until 22 May to decide whether they are going to appeal against the ruling.

Doug Taylor, personal finance campaigns manager at Which?, said: "The banks should do the right thing now: concede defeat, agree with the OFT what constitutes a fair unauthorised overdraft fee and refund their customers as soon as possible.

“The FSA must now drop its waiver so that the thousands of cases pending in the county courts and Financial Ombudsman Service can be processed. Every second that this issue remains unresolved is costing consumers up to £111 in overdraft charges.

“This whole saga has severely damaged the reputation of the UK’s high street banks. If they appeal, drag their heels in refunding their customers or try to introduce back-door charges to recoup their losses, their customers will see this as adding insult to injury.”

If an OFT investigation concludes that the charges are unfair it could cap fees at a much lower rate.This could open the floodgates for hundreds of thousands more applications for fee refunds.

The OFT has already ruled that excessive credit card fees are unfair and forced the banks to slash charges from up to £35 to £12.