Thousands of bank customers moved a step closer to having their overdraft charges refunded yesterday after the High Court in London ruled that they are subject to official regulation by the Office of Fair Trading.

Campaigners against the fees, which can exceed £30 per transaction and are estimated to earn UK banks between £2bn and £3.5bn a year, said the ruling represented a significant hurdle which could pave the way for future payouts worth more than £1.1bn.

Mr Justice Andrew Smith found that the charges were subject to the OFT's "unfair contract" rules, in a test case brought between the OFT, seven banks and a building society.

But he stressed that the ruling did not cover whether the charges were fair - a matter that is expected to be decided at further hearings later this year.

Until then, thousands of cases brought across the UK by bank customers which have been put on hold by the Financial Services Authority last July will not be able to proceed.

In Scotland, where the FSA waiver is not binding, a handful of cases have been allowed to proceed but the vast majority have been put on hold pending the outcome of the test case.

Mike Dailly, principal solicitor at the Govan Law Centre, who has led the campaign to reclaim charges in Scotland, said it was possible that sheriffs may allow more cases to proceed following the High Court ruling.

"All a sheriff would have to decide is whether the charges are fair and there's absolutely no way the banks can claim they are," he said. "The game's really up for the banks but I imagine they will try to drag this out."

The fall-out between banks and their customers began in 2005 when a handful of people successful argued that they had been charged unfair bank charges.

In the ensuing avalanche of cases which preceded the FSA's waiver, banks were forced to pay out in thousands of cases. Annual results for the major high street banks show they have so far paid out more than £559m in refunds to customers. The actual total will be higher as both Abbey and Nationwide Building Society declined to disclose how much they had refunded.

The charges are incurred when bank customers take out an unauthorised overdraft or breach their authorised limit. The disputed fees can be as much as £35 for a single bounced payment, although campaigners claim the cost to the banks could be as little as £2.50.

In yesterday's ruling, the judge accepted the banks' argument that the terms generally used for personal current accounts were not unenforceable on the grounds of being "penal". And he held that the terms, with a few minor exceptions, were in "plain and intelligible language".

But he rejected their argument that the charges were exempt from assessment for fairness under the regulations. The banks contend that the charges are fees for a service, namely setting up an overdraft, and they are not unfair.

HSBC has said that in the worst-case scenario total refunds could reach £303m if it loses the court case.

The other banks involved declined to predict the total liability they would face if they lost the case, but if like HSBC total payouts would be more than double what they have refunded so far, banks could collectively face a bill of more than £1.1bn from the issue.

Members of the industry have also warned that losing the case is likely to lead to the end of free banking in the UK, with consumers instead having to pay a monthly fee or a fee for every transaction.

The banks involved in the case are Abbey, Barclays, Clydesdale, HBoS, HSBC, Lloyds TSB, RBS and the Nationwide.

A statement by the British Bankers' Association welcomed what it said was a "complex" case but said it would continue to ask county and sheriff courts to put any further individual cases on hold until the test case was resolved.

It's not the practice, it's the amount
Case study

GOING up against a major UK bank and its team of top-flight lawyers was daunting for Paul Harbour, one of the handful of people whose case has been allowed to proceed recently and who initially represented himself in court.

But after submitting his claim last year - a relatively minor matter of some £350 - at Edinburgh Sheriff Court, he was surprised to have been given a sympathetic hearing and eventually won his case.

"I got the money just before Christmas, which made for a nice present. I was just glad, not to get one over on the bank but to get the money I was due. I'm not against banks charging, it's just the amount they charge."

Mr Harbour, 32, who was working as a staff nurse at the time, believes, along with solicitor Mike Dailly, who helped him free of charge in the latter stages of the case, that the point at which the bank decided to settle was when it was asked by the court to provide an explanation for their charges.

"If they have worked out their charges fairly, they should have a document to explain those calculations," Mr Dailly said. "But whenever the banks have been ordered to produce this, they settle the case.

"My suspicion is that no such document exists. The banks haven't worked out the charges in any reasonable manner, they are simply copying what other banks are charging."