The High Court of Australia last week dealt a blow to the big four banks when it overturned a Federal Court ruling and found that certain fees charged by banks — specifically honour, dishonour, non-payment and over-limit fees — could be classified as “penalty fees”.
Federal Court justice Michelle Gordon had erroneously found those fees weren’t able to be deemed penalties (effectively limiting the action only to “late-payment fees”). The former tax lawyer’s decision was roundly overturned by a unanimous High Court bench.
In effect, what that means is the banks now have to defend the matter against the full range of fees they charged customers, not just late payment fees. Currently, eight class actions are ongoing, with more than 170,000 bank customers claiming more than $220 million in allegedly unfairly charged fees. Other banks involved include Commonwealth Bank, National Australia Bank, Westpac, St George, Citibank, Bankwest and Bank SA.
The class actions are being led by Financial Redress, a group started by British expat and former corporate lawyer James Middleweek. Financial Redress was purchased by litigation funder IMF Australia, which is funding the bank fee cases. IMF has had a stellar sharemarket run recently, with its shares recently closing at $1.43 on the back of strong profit results, up from $0.45 in 2008.
The decision, while a win for the applicants, isn’t the end of the story. Instead, the matter is returning to the Federal Court to determine whether the fees charged by ANZ (which is the respondent in this particular case) amounted to unenforceable “penalty fees”.
Andrew Watson, a Maurice Blackburn partner involved in the action, stated the decision represented “an important point of law … which has expanded the doctrine of penalties, so that the courts will now focus on the reality of these sorts of fees”. In short, the High Court found the fees charged by the banks are capable of being penalty fees — it’s now up to the Federal Court to determine whether they actually were penalties.
Despite the High Court setback, ANZ Australia boss Phil Chronican refused to concede that the bank was at fault when it charged customers fees of $35 or more for transactions that most likely cost the bank a few cents. (The ANZ, like most other banks, has removed most exception fees for customers, but refuses to concede it was at fault when it collected hundreds of millions of dollars from the fees in prior years.) Chronican told a press conference the bank had “consistently maintained that while these fees have been unpopular, they are reasonable fees for service” and that the bank would show that it employed “several hundred staff” to chase out-of-order accounts.
Bank shareholders would be hoping the ANZ had more than a few hundred staff chasing overdue accounts if that is their supposed rational for the fees. Even if the staff figure is correct (and it’s somewhat dubious to claim that all of the bank’s debt collectors are related to penalty fees), and those staff did nothing else but collect debts, ANZ was still earning interest (often upwards of 18%) on the outstanding monies. Moreover, a few hundred staff would probably cost the bank maybe $15 million annually, compared with the hundreds of millions it was reaping from fees. For example, late-payment fees were imposed when the customer was even a day late on payment, well before any debt collector would be called to investigate.
Middleweek explained in a statement that “the onus is now on ANZ, and the other banks, to show how fees of typically $30-$35 can be justified when a consumer is a dollar over or a dollar late settling an account. The fact that many banks have since eliminated or slashed these fees make that task even harder”.
The High Court ruling continued a tumultuous period for Federal Court justice Michelle Gordon, who was part of the full Federal Court in the 2011 Vioxx decision, which Slater & Gordon boss Andrew Grech accused of being an “appalling” decision. (A similar matter was settled by Merck in the United States for $US4.85 billion).
*Disclosure: the author successfully took legal action in 2008 against Citigroup regarding an illegal penalty fee but has no involvement or association in the IMF matters
The banks charge these fees because they can. It’s a result of there being little effective competition between the banks in the relatively isolated Australian market. Indeed, I regard some of the fees charged by banks as being little more than legalised pilfering. Unless we can do something to bring about real competition between the banks, we need closer regulation. After all, we know they’re too big to fail and the taxpayer will bail them out if they get into big trouble, so they’re not like normal private businesses. If the court finds that some of these fees are legal, the parliament should intervene. Of course there’s no point introducing limits to some fees in the current environment – the banks would all charge the maximum. The fees should be banned or allowed only subject to detailed reporting to justify.
@Steve: When, not if, they lose the class action, they may think twice. Reducing them now is an admission of guilt.