Thousands of consumers complaints concerning bank charges have been put on hold ahead of a case concerning the legitimacy of charges for unauthorised borrowing to be heard in the High Court in the new year.

Banks have been given a reprieve from paying refunds for overdraft charges by the Financial Services Authority (FSA) pending the outcome of the case. Furthermore, the Financial Ombudsman and some lower courts have stopped dealing with bank charges cases in anticipation of the outcome of the legal battle.

The FSA says it will allow banks to continue a temporary "waiver" on their handling of complaints, but will be examining how customers were treated during the waiver period. In particular, it pledged to keep a close watch on banks to ensure they don't make "materially adverse changes in the level of unauthorised overdraft charges".

Seven major banking institutions, in conjunction with the City watchdog and the Office of Fair Trading (OFT), initiated a test case in July 2007 on the legality of overdraft penalty fees in the High Court.

If the ruling goes in favour of bank customers it could cost the banks as much as £10 billion. It could also bring about the end of “free” current accounts as banks try to recover costs.

The banks argue that their charges, which can be as high as £35 for a bounced cheque, pay for a service and are therefore not covered by current consumer regulations. These state that penalty fees should cover only the banks’ processing costs. However, the OFT rejected this argument.

The OFT said: “The banks do not accept that the unfairness rules of the Unfair Terms in Consumer Contract Regulations apply. The OFT believes that they do and is seeking to establish this legal principle in court.” They have also criticised some of the banks’ terms and conditions, which are “liable to mislead” customers.

Angela Knight, chief executive of the British Bankers' Association (BBA), said: "Establishing legal clarity on the issue of bank charges is of paramount importance, not only for the banking industry, but for all customers now and in the future."

"The banks have always been firmly of the view that the fees they charge customers are fair and clear. The court case will clarify these points and provide certainty for customers and banks alike."