The Office of Fair Trading has lost its legal battle over bank charges with banks following a shock announcement by the Supreme Court today.

The four-year campaign and two-year legal case to win refunds for those overcharged by their banks after falling into an unauthorised overdraft – which were once up to £39 a time – has fallen at the last hurdle.

In a move that stunned campaigners, the Supreme Court went against earlier findings by the High Court and Court of Appeal and decided the OFT did not have the right to assess the charges for fairness in a case bought by seven banks and one building society.

If the ruling had gone against the banks, it could have cost them up to £20bn in repaid bank charges.

The court ruled that overdraft charges 'formed part of the process of renumeration of the package of services that the banks provide to their current account customers'.

The ruling effectively scuppers any chance of reclaiming fees. The court also stated it was 'not necessary' to refer the matter to the European courts. It said the Government may be able to change the law governing charges, the Unfair Terms in Consumer Contract Regulations 1999, or that charges may come down through future competition between banks.

A spokesman for the British Bankers' Assocation said: 'The banks acknowledge the unanimous decision of the Supreme Court to allow their appeal in respect of these charges. We recognise this issue has been of real concern to a large number of our customers and we are pleased that this decision now brings clarity for all parties.

'The banks will work with the regulators to ensure that the outstanding customer complaints are brought to a swift conclusion. We will also continue to work together with the OFT in connection with its on-going market study.'

The news delivers a bitter blow for those stung by high charges and who's attempts to reclaim that money were put on hold by the Financial Services Authority until the court made a decision.

Marc Gander from the lobbying organisation Consumer Action Group said: 'We are totally stunned and I think the banks themselves must be stunned. I am sure this isn't the end of the issue. The charges are excessive and cannot be allowed to persist.'

Today's announcement is the culmination of an 18-month court battle between the banks and OFT, during which all bank charges have been placed under a waiver by the City watchdog, the Financial Services Authority, until a final result is known.

The OFT's report into the charges, which was expected to lambast banks for overcharging, was due to be released early next year. They may still publish those findings.

The OFT said it was 'disappointed' by the announcement. It is currently considering the judgement before deciding whether or not to continue with its investigation.

Following its publication, the FSA was expected to lift its waiver, allowing millions of reclaims to go ahead. However, the OFT report has now been rendered impotent.

The Government appeared to take a robust stance against banks after the ruling. Sarah McCarthy Fry, Exchequer Secretary to the Treasury, said: 'Consumers, who have been waiting a number of years, will be extremely disappointed with this outcome. It's clear that in the past, banks were not thinking enough about their customers. That needs to change for the future.

'While the decision on past charges has not gone in favour of consumers, we are determined to ensure the system is made fairer in the future. The Government will work with the OFT and Financial Services Authority to reach a new framework for fairer bank charges going forward.'

Money Mail, our sister title, and This is Money have campaigned since 2006 on the unfairness of bank charges and our reports on the practice of excessive fees go back even further: See the full campaign

Q&A on what today's ruling means

What has happened?

The Office of Fair Trading has lost its 18-month legal battle with eight High Street banks over the fairness of bank charges. The Supreme Court ruled in the banks' favour this morning.

How come the banks won?

The Supreme Court can overrule the decisions of the High Court and Court of Appeal. These lower courts argued charges could be assessed for fairness outside of the Unfair Terms and Consumer Contract Regulations 1999 – that they did not form part of the 'core terms' of a contract between customer and bank. However the Supreme Court followed the letter of the law and decided the charges were part of the core contact.

The upshot of this is the court believes the charges are fair as they are levied by the bank for a service rendered; for example, a customer pays a £25 overdraft charge for the privilege of having an unauthorised overdraft. The customer agrees to this by opening an account, as the terms are spelled out in the underlying agreement.

What options are now open to the OFT?

There are very few options. The Supreme Court said there was no need to refer the matter to the European courts. It's also worth noting that even if it wanted to, the OFT may have little appetite for that. The reason this case went to Britain's highest court was because the OFT was seeking legal clarity on a technicality. It now has that. Its case has fallen completely flat and its upcoming report on the fairness of charges has been robbed of its potential potency.

As an aside, the court papers state: 'The charges might be open to assessment by the OFT on other grounds under Regulation 5'. They do not explain what this Regulation 5 is. We have questioned the court and are awaiting their response.

Can anyone else carry on the campaign?

If the OFT is prevented from fighting on in Europe, an individual – that is an everyday consumer – may be able to take this case to the European Court of Justice and set a precedent that way. Any ruling by the European courts must be adopted by any member states. It is unclear at this time whether this is possible.

So is there any chance of getting bank charges back?

For the time being, it looks incredibly slim. The banks will begin to write back to the 1.1m customers who have claims pending, essentially saying they have no right to claim the charges back.

Are there any winners from this ruling?

Those who never use an unauthorised overdraft will be relieved. Under the system of recent years, banks have applied what the OFT calls 'excessive' fees for current account misdemeanours, which has enabled them to subsidise accounts for those who run a clean account. In many other countries, monthly or individual fees are charged for services.

What if I have already won my charges through the County Courts – will I have to give them back?

The British Bankers' Association said any case already won through the County Courts is safe and consumers do not have to give back the money reclaimed.

Are banks still applying big charges?

Most of them are typically charging between £8 and £20 now - so less than they were before. But £20 is still massive above the true costs to the bank. Previous industry estimates suggest it only costs a few pounds to send out a letter or bounce a cheque. On credit cards, for instance, the OFT was able to impose a limit of £12 on charges.

What options are there for accounts with low charges?

Abbey, Alliance & Leicester and Barclays all offer a 0% authorized overdraft for a year. In the case of both Abbey and Barclays you must switch your account from another provider and put in at least £1,000 each month, says David Black of research firm Defacto. Alliance & Leicester requires a deposit of at least £500 each month.

Cahoot have a £100 interest-free overdraft and have an authorized overdraft rate of 11.8% APR on balances up to £1,000. If you can deposit at least £1,500 every month Norwich & Peterborough Building Society's authorized overdraft rate is 11.74% EAR.

Alan O'Sullivan, This is Money
25 November 2009