The legal battle over bank overdraft charges moves to the House of Lords today, where high street banks and Nationwide building society will bid to over-turn a previous ruling by the Court of Appeal.

Last year the Court ruled that the Office of Fair Trading (OFT) had the right to investigate the legality of bank charges, a claim that the banks are disputing.

It is estimated that banks could be forced to refund up to £1 billion in charges if they lose the battle with the OFT and face losing £2.6 billion a year in lost revenue.

Banks and building societies charge customers up to £39 for an unauthorised overdraft or a bounced cheque or payment, but experts have suggested that the cost to banks is as little as £2.50. The OFT believes the charges are disproportionate and wants to carry out an investigation under the Unfair Terms in Consumer Contracts Regulations 1999.

Before the start of the test case, banks had already refunded around £500 million in charges to more than 350,000 customers.

When the test case began in 2007, the Financial Services Authority (FSA) announced a "waiver" allowing banks and building societies to freeze bank charge claims until a decision had been reached. It is estimated that around a million customers are waiting to find out whether they can reclaim charges dating back to 2001.

However, the FSA waiver does not cover cases involving customers who are in financial hardship. Peter Vicary-Smith, chief executive of Which?, said: "If you're struggling with basic living costs such as rent and utility bills then you may be eligible to get your claim fast-tracked under the terms of the waiver. The FSA must take action against any bank ignoring the financial plight of its customers."

"It's disappointing that nearly two years since this saga began, little has changed for the millions of consumers being hit with these charges."

A number of banks have overhauled their charging structures since the beginning of the test case.

In the last year three of the banks fighting the OFT have also come under state control. Halifax Bank of Scotland has now merged with Lloyds TSB, creating Lloyds Banking Group, in which the taxpayer has a 40 per cent controlling stake. The Government also owns 69 per cent of Royal Bank of Scotland. The other banks involved in the court action are Abbey, owned by Santander, Barclays and Clydesdale, owned by National Australia Bank, along with Nationwide building society.

A ruling from the House of Lords is expected in the Autumn. If the banks lose they could seek a judgement in the European Court, allowing them to delay the repayment of charges for several more years.

Experts fear that if charges are outlawed, banks could be forced to replace lost revenue with fees for running current accounts, heralding the end of free banking.