The competition watchdog has launched a court case against the major banks to establish whether their unauthorised overdraft charges break the rules.

The Office of Fair Trading lodged papers with the High Court after eight high street banks agreed to a test case to settle the issue.

The OFT, which has been investigating the charges since March, believes they are unfair, but this is disputed by the banks.

Tens of thousands of consumers claim they have been hit with unfair bank charges, such as those levied on people who breach their authorised overdraft limit, and many have taken their bank to court.

Customers can be fined as much as £39 for a single bounced payment. While it has never been revealed how much an unauthorised overdraft actually costs banks, some commentators have estimated it could be as little as £2.

At the heart of the dispute is whether the rules of the Unfair Terms in Consumer Contract Regulations apply to the charges, and if they do, whether the level they are set at is fair.

The British Bankers' Association said the banks are working with the OFT and City watchdog the Financial Services Authority to ask the courts to clarify the legal position regarding overdraft fees. But it added that the banks still believe the fees are clear and fair.

Meanwhile, the FSA has agreed to allow banks to stop dealing with complaints over unauthorised overdraft charges until the courts have issued a judgment, and the Financial Ombudsman Service is suspending its work on the issue.

The banks involved in the action, which include Barclays, HSBC, Lloyds TSB, the Royal Bank of Scotland, HBOS and Nationwide Building Society, together account for around 90% of the current account market.

It is thought UK banks have so far paid out around £200m in out-of-court settlements to customers who complained about the fees.

Welcoming the move, Doug Taylor, personal finance campaigner at Which?, said: "This announcement is a victory for common sense.

"A lot of time and money could have been saved if the banks had not tried to evade questions about their charging structures for the past year. It's unfortunate that it has to go to court, but at least we will get a decision that banks cannot dispute."

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