A landmark test case on charges for unauthorised overdrafts has finally got under way, with the high street banks claiming the fees are fair.

The hearing in the High Court's commercial division is being brought by the Office of Fair Trading, seven leading retail banks and the Nationwide building society.

The watchdog claims overdraft charges come under the 1999 Unfair Terms in Consumer Contracts Regulations.

But Abbey, Barclays, Clydesdale, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland Group and the Nationwide contest this.

They argue that all customers agree to conditions on an overdraft when they open an account, and these include fees covering the package of services they receive.

Lawyers for the financial institutions told the court that consumer contract "fairness" rules do not apply, and that even if they do, the fees are not unfair.

And a representative for one of the banks said the Office of Fair Trading must accept part of the blame for the "torrent" of court hearings launched by angry customers over their bank charges.

Laurence Rabinowitz QC, for Royal Bank of Scotland Group, told Mr Justice Andrew Smith the "flood of claims currently engulfing the court system" are down to "ill-judged comments" from the OFT.

He said the regulator stated the same principle for credit card fees applied to current accounts.

This comment was "unfortunate" because it was made before the OFT had even begun its probe into overdrafts, he added.

The banking giants also refuted suggestions that overdraft conditions are not in "intelligible" language.

Mr Rabinowitz said the wording used is straightforward and easy to understand.

Banks are believed to make between £2bn and £3.5bn a year in fees charged when customers go into an unauthorised overdraft.

Customers can be billed as much as £39, but campaigners claim that the actual cost is as little as £2.50.

However, experts have warned that if the charges are scrapped or reduced, it will spell the end of free banking in the UK as everyone will be charged a monthly fee as the companies look to replace the lost revenue.

The hearing continues.

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