BANKS have been accused of imposing illegal charges of hundreds of millions of pounds on customers who have gone overdrawn.

The Office of Fair Trading believes the charges may be unlawful and is expected to investigate. Legal experts say penalty charges must reflect the actual costs incurred by the banks as a result of the overdraft.

Customers are demanding that charges which have been routinely applied on unauthorised overdrafts must now be paid back and many have already forced banks to do so. They say the charges are a “flagrant” breach of consumer law.

It emerged last week that banks are already making compensation payouts of as much as £3,000 to customers who have complained, rather than try to defend the penalties in court. Campaigners want a judicial review of the issue to confirm that many of the charges — estimated by Which? at £4.7 billion a year — are unlawful.

Stephen Hone, 30, of Plymouth, who has led the campaign against them, is seeking public funding for the move. He believes a judgment in his favour could trigger one of the biggest compensation payouts in British banking history.

He has already been paid £5,000 by the Abbey to drop a legal claim for repayment of £840. Other bank customers he has advised have been repaid more than £150,000 without any going to court.

“We do need a legal ruling to ensure the charges are stopped and to make sure everyone is entitled to their money back,” said Hone.

Halifax, HSBC, NatWest and Barclays are among the banks that are already paying back charges to customers. A spokeswoman for the British Banking Association said the charges were “fair and transparent” but complaints were being dealt with on a case-by-case basis.

“Consumers are fighting back and seem to have found a chink in the banks’ armour,” said Eddie Weatherill, of the Independent Banking Advisory Service. “The banks don’t want to see this tested in court because the law is not on their side.”

Hilary Baker, from Castle Combe in Wiltshire, is among the customers who have won a payout. “I asked for all my statements from Alliance and Leicester going back six years and then added up all the charges, which came to about £1,200,” she said.

“They said they hadn’t done anything unlawful but when I filed a case in the courts they sent me a cheque. It included every charge they had made and my costs. It came to £2,484.”

Jessica Armstrong, 24, of north London, a sales account handler for a publishing company, was charged £350 by Abbey when she unknowingly exceeded her £850 overdraft limit by about £100.

“When my statement came, I honestly couldn’t believe it,” she said. “For every payment I had made or every direct debit that had gone out, however small the amount, they had slapped on a £30 charge. Overall I had been charged £350. When I got through to the right person they told me I should have known about these charges because they are set out in the terms and conditions.”

Anthony Scrivener QC, an expert in consumer law, said that if any case went to court, banks would have to prove their penalty charges were a fair reflection of costs incurred by unauthorised overdrafts.

Even if the charges are ruled unlawful, the banks are likely to argue that customers should not be entitled to retrospective payouts. But Stephen Sidkin, a commercial lawyer with City legal firm Fox Williams, said it would be a difficult position to maintain. “If someone takes an action against a bank to recover charges, I think it would be open to them under the law of contract to go back six years.”

There are signs that the banks are starting to fight back against claimants. Alliance and Leicester has started to close the accounts of some customers who have demanded their money back.

The scrapping of high penalty fees is likely to lead to charges on accounts that are now free. Dyfrig John, HSBC’s chief executive, said last week that greater transparency in charges would mean a move towards “fee-based” accounts. HSBC later denied this would mean the end of free banking.

The British Bankers’ Association said its members believed penalty charges were fair and customers got a “good deal”.

Abbey said that although it believed its penalty charges were fair, “commercial reasons” dictated that paying back Hone’s money was the best option.

Explore UK News

• Crime News

• Education News

• Health News

• Science News

• Scotland News

Times Recommends

• Donor organ allowed child’s own heart to heal
• Michael Jackson: Not the final chapter
• Brüno toned down for 15 rating