It's still unclear exactly what is, and isn't lawful.
The matter has been going through the courts since July 2007. The Office of Fair Trading wanted to carry out an investigation into the matter, but the banks argued that their overdraft charges fell outside the scope of the 1999 Unfair Terms in Consumer Contracts regulations.
The High Court (and, subsequently, the Court of Appeal) have now ruled that the OFT can investigate bank charges and rule as to whether they're unlawful or not:
http://news.bbc.co.uk/1/hi/business/7910852.st m
However that decision doesn't necessarily mean that the OFT will find that the charges are actually unlawful. The banks still have quite a strong legal case for claiming that they're not. No decision, from the OFT, is expected before next year. If it goes against the banks, there will probably be another year or two of appeals after that. Only then will it be absolutely clear whether the banks have the right to levy such charges.
A decision against the banks would obviously be beneficial to those who go overdrawn but other bank customers would lose out. That's because that, if the banks can't levy high charges, the era of 'free banking' might be over for all bank customers. In most other European countries bank charges aren't as high but that's only because all customers have to pay a monthly fee (typically around �20, but sometimes a lot higher) for the privilege of having a bank account.
Chris