An appeal by eight banks, against a High Court ruling allowing regulators to investigate the fairness of unauthorised overdraft fees, has been thrown out.

The Appeal Court ruled that the Office of Fair Trading had the power to launch an investigation that could cost the banks up to £2.6 billion a year in lost revenue, and force them to make up to £1 billion in refunds.

The ruling comes after a 13 month battle for consumer groups, who have urged the banks to back down and pay back unfair charges. However, acting against the advice of the appeal judge, the banks have decided to make another appeal, this time to the House of Lords, which could delay an investigation further and hold up the cases of thousands of claimants.

Peter Vicary-Smith, chief executive of Which?, the consumer organisation, said “The courts have made it clear the banks should now throw in the towel. This case has been going on too long and it’s about time they tried to regain some of their dignity and paid customers their dues.

“This whole saga has severely damaged the banks’ reputations. If they try to appeal in the face of such a clear decision, they will suffer further losses in the court of public opinion,” he added.

Under the latest ruling, the Office of Fair Trading will able to decide whether bank overdraught charges are fair or not. Last year the OFT deemed that eight UK banks had levied unfair charges on unauthorised overdraft limits and bounced cheques. The banks argued that their charges could not be included under the 1999 Unfair Terms in Consumer Contracts regulations, but the High Court rejected this claim, prompting the banks to ask the Court of Appeal to overturn that decision, which it refused to do.

But, faced with financial problems of their own, the banks are reluctant to make extra payouts to customers. If the OFT has its way, it could cap the charges for bouncing cheques and exceeding overdraft limits at a rate far below current fees. In a similar case, fees for late payments on credit cards were capped at £12, where previously they had cost consumers up to £35.

The OFT has not yet revealed how low these caps could be. However, as well as reducing their charges, banks may also be forced to refund charges that have since been deemed unfair.

Analysts warn that putting this form of financial pressure could result in the end of free banking in Britain, with all customers instead paying a monthly fee or a fee for each transaction they make.

Since the beginning of 2006, encouraged by consumer groups, thousands of UK customers have tried to reclaim charges on the ground that they are too high and unfair. Already the UK’s banks have repaid an estimated £784 to about 378,000 customers in out-of-court settlements.

A further 65,000 claims are known to be on hold in the English county courts alone.

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