This is a very interesting post, and I think it deserves some detailed commentary. I have experience with current-account T&Cs and reclaiming charges from my bank, and I have thought about the issue quite carefully over the years since then.
What a consumer *expects* to happen in a current account with no overdraft, and what *actually* happens in practice, differ by quite a large degree. The present OFT investigation and test case are attempting to determine whether this discrepancy is illegal. The precise semantics of the discrepancies have changed since I made my claims in mid-to-late 2005.
At first, the banks were claiming the charges under a "breach of contract" theory, namely a perfectly reasonable obligation in the T&Cs to ensure you had enough money for any transaction instructions beforehand. English contract law allows for "liquidated damages" to be agreed in advance, to allow such common breaches to be settled without involving the legal system. However, these liquidated-damages clauses have defining rules, which we were easily able to show that the banks were not following, and therefore they were illegal "penalty charges" rather than "liquidated damages".
More recently, and indeed starting in late 2005, the banks have been trying to claim that the charges are "fees for a service". Let me quote from a post I made at the time, dated 9/Nov/2005:
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"It is denied that the fees charged for the services provided by the defendant amount to a penalty charge or a liquidated damages clause. The fees are an agreed price for a service provided."
| A service provided? I'm assuming these are "unpaid item" type charges, in which case they're actually charging you for *refusing* to provide a service.
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It seems that the OFT test case's judge agrees with me on that point, and has summarily thrown out the banks' argument in this vein.
In summary, the banks are not allowed to charge *such high amounts* if they are under breach-of-contract theory - the limit is likely to be on the order of £1 a go, if that - *and* they are not allowed to claim that these charges are "fees for a service" any more, which is so obvious that I'd like to know what the banks were smoking when they came up with it.
Now of course, the way a consumer *expects* a bank account to function is that if they don't have funds for a transaction instruction to be fulfilled, then the transaction simply doesn't happen, with no penalty charges (at least not beyond any normally applicable transaction fee). Strangely enough, this is precisely what happens when a debit card is used, but not when a direct-debit or a cheque is involved.
As a computer engineer, this boggles my mind - the bank has *more* leisure and information available at the end of the day when they process DDs and cheques in batch-mode, than they do when processing debit-card transactions in realtime during the day!
Now as to how banks can put charges directly on your account... this is, in practice, a special privilege they have. They do it this way because it is more efficient and, nominally at least, involves less paperwork.
Legally, I don't think a bank account has any fundamental difference from a utility account - there is a balance which may be credit or debt, and there are mechanisms to pay debts and refund credits, and the organisation in question sends you a regular statement of account (which might be called an invoice in some cases).
Practically, there is a huge difference, because people nowadays treat their bank account like a very large wallet, thanks to the technological advance of debit cards, which utility companies do not usually provide. If you play AD&D, think of it as a "Bag of Holding" which can only hold money. So when the charges take your account spiralling into the red, you suddenly have a "virtual wallet" which has turned into a bottomless pit - a "cursed Bag of Holding".
(Hmm, I must remember about this particular metaphor. It seems quite apt.)
I hope this clarifies matters.
How is an unauthorized overdraft essential? 
