Britain's consumer watchdog has dropped a two-and-a-half year probe into overdraft charges that could have cost banks billions of pounds, following a surprise court ruling in favour of the country's lenders last month.
The Office of Fair Trading (OFT), however, said it still had "significant concerns" on current accounts and would now hold talks with banks and their customers to look at alternative solutions, including a voluntary deal or new legislation.
Today's move, which disappointed scores of consumer groups, was largely expected in the industry after a Supreme Court ruling in November said the consumer watchdog could not use customer protection rules to investigate whether unauthorised overdraft fees - which can be as high as £35 pounds per breach - were unfair.
The court case involved Britain's largest retail lenders, HSBC, Lloyds Banking Group, Abbey (now owned by Spain's Santander), Royal Bank of Scotland, Barclays, Clydesdale (part of National Australia Bank), HBOS - now owned by Lloyds - and building society Nationwide.
"From a consumer perspective, it's obviously really disappointing," said Michelle Slade, personal finance expert from Moneyfacts.
She added that despite consumers having the option to pursue individual claims, many will opt to back down at this stage.
"Most people are going to follow the OFT and say, I'm not likely to get my money back and give up. It looks like the banks have won," she added.
The OFT said today that the court ruling meant any investigation into the fairness of unarranged overdraft charges would have a "limited scope" and little hope of succeeding.
"The Supreme Court judgment was not the outcome we had hoped for and was disappointing for many bank customers," OFT chief executive John Fingleton said.
"Having now considered in detail all the options available to us in light of the judgment, we have decided not to continue what would be a narrow investigation with limited prospects of success," he added.
The banks welcomed the decision today, and said they would continue to work with the OFT.
"The banks understand customers' concerns, and talk to their customers regularly and develop accounts in line with feedback," the British Bankers' Association said in a statement, adding the current account market was "dynamic and competitive" and banks continued to improve the transparency of charges.
But the OFT vowed it would continue to fight to protect consumers against opaque overdraft charges through voluntary arrangements with the banks "or by other means".
"We are committed to securing significant changes to unarranged overdraft charges going forward," said Mr Fingleton.
The OFT's 2008 market study found banks earn around a third of their retail revenues from unarranged overdraft charges which it said were not subject to effective consumer controls.
An earlier study found the banks benefited in 2006 from £2.6 billion in charges associated with unauthorised overdrafts and questioned whether they are linked to banks' administrative costs.
Analysts estimated the cost of defeat for the banking industry in the long running battle with the OFT would have been over £2 billion in refunds and lost revenue from Britain's 54 million active current accounts, as thousands of consumers went to court to reclaim the charges levied.
The consumer body said it would now begin intensive talks to discuss the issues with banks, consumer groups and other organisations, and would report on its progress by the end of March 2010.
November's court ruling came after the lenders appealed in June against an earlier court decision, which said fees for unauthorised overdrafts fell under the scope of consumer contract law and could be assessed for fairness by the OFT.
Overturning that ruling, the Supreme Court said last month the charges imposed by banks formed part of their fees for current account services and could not be assessed for fairness under Britain's Unfair Terms in Consumer Contracts Regulations.
But the court said parliament may wish to consider the matter, by boosting consumer protection, and left the door open for the OFT to assess the charges on other grounds.
Reuters