Millions of consumers' hopes of reclaiming unauthorised overdraft charges were dashed when the banks won a surprise victory in the Supreme Court.

The UK's highest court ruled the charges do not come under "unfair contract" rules, meaning they are not subject to regulation by the Office of Fair Trading.

The ruling, which was described as a "bitter blow" for customers, who will not now be able to reclaim money they had paid out in the charges, ends a test case on the issue started more than two years ago.

More than one million claims have been put on hold since the case was launched in 2007, while a further eight million people are estimated to have paid the charges since July 2001, but not yet submitted a claim to get their money back.

Angela Knight the Chief Executive of the British Bankers Association outside the Supreme Court Full Image

Which? chief executive Peter Vicary-Smith said: "This is a bitter blow for the millions of people who have been patiently waiting to get their bank charges back. Not only does it give banks licence to charge what they like for unauthorised overdrafts, but it could have ramifications for other areas of personal finance. The banks now have no excuse for introducing other fee charges."

But the ruling was better news for consumers who do not breach their overdraft limit or go into the red without permission, as it was feared a verdict against the banks would have heralded the end of free banking in the UK.

Unauthorised overdraft charges generate around £2.6 billion of revenue a year for banks.

Industry commentators had warned that if the banks lost this lucrative income stream they would look for other ways to recoup it, such as through imposing a flat monthly fee on current account customers or charging for every transaction people carried out.

The Supreme Court also offered a glimmer of hope to consumer groups, saying that although unauthorised overdraft charges do not come under the "unfair contract" rules, the OFT may be able to assess them under other criteria.

The OFT said it was now considering the details of the judgment before it made a decision on whether or not to continue its investigation into the charges. It plans to make a statement on the issue next month.