In 2004, a groundbreaking report (PDF) by Nicole Rich, now of the Consumer Action Law Centre, argued why some bank penalties are likely to be legally unenforceable:
“A contract penalty is considered ‘excessive’ — and therefore unenforceable — if it’s not a genuine pre-estimate of the loss suffered by the bank as a result of the customer breaching a term in their contract.”
“And there’s a second argument in Victoria, the only state with Unfair Contract Terms legislation, that some penalty fees represent an unfair contract term, making them null and void.”
Not just the banks
Some other penalties are also blatantly unfair, and it’s not just banks that charge them:
The largest credit union, Credit Union Australia (CUA), for example, charges you $9 (previously $15) when someone who writes you a cheque doesn’t have enough money in their account to cover the transaction (the person who wrote the cheque would also be charged a penalty by their own financial institution). Until 2007, CUA charged $20, but reviewed the fee and reduced all dishonour fees by $5 following the launch of our campaign. Credit unions claim that on average their penalty fees are lower than banks’. In 2008, CUA told us "We are keeping pressure on our bankers to reduce their fees to us, which represent the vast majority of what we charge to our customers".
Australian Central Credit Union charges a $15 inward cheque dishonour fee.
None of the big five banks charges this inward cheque dishonour penalty; St George, which was recently acquired by Westpac, dropped its $10.50 inward cheque dishonour fee in June 2007 following our Fair go on fees campaign. Citibank also dropped this inward cheque dishonour fee.
Penalties don't match cost
The crux of these legal arguments is over banks’ costs.
- The banking industry says its costs (for example, to process direct debit dishonours or to honour transactions that cause your account to go overdrawn) are commercially sensitive and won’t be released.
- There’s no publicly available evidence that financial institutions' penalty fees are a genuine estimate of their costs.
- The total amount of that penalty fee income for the banks is also unclear, because banks’ annual reports don’t separate the income they receive from penalties from other fees (ATM withdrawal fees, account-keeping fees, etc).
- Previous conservative estimates by the Consumer Action Law Centre and CHOICE suggested banking penalties were worth hundreds of millions of dollars each year. In May 2009 the Reserve Bank of Australia published, for the first time, the value of these penalty fees. It turns out our estimations really were conservative — the big banks charged almost $1 billion in penalty fees in the previous year.
Bankers' Association position
In 2007, we asked the Australian Bankers' Association (ABA) to comment on what critics view as penalties that are excessive, unfair and potentially illegal.
“We recognise that there has been extensive community debate about these fees,” it said. The ABA’s member banks are reviewing their terms and conditions on relevant products.
The ABA's member banks are now providing more information and better disclosure of what it calls ‘exception fees’, making it easier for customers to compare fees between financial institutions. The ABA added that exception fees are avoidable and encourages consumers to check their account balance before making a transaction. See Avoiding penalty fees for our tips.
While better disclosure is welcome, CHOICE’s view is that focusing on it as a solution to the penalty fees problem misses the point. We think the problem is these penalty fees are unfair and too high.
Overseas action over illegal fees
In 2006 the UK Office of Fair Trading (OFT) investigated credit card default charges there and found they’d been set at a “significantly higher level than is legally fair”. It estimated that illegal penalty charges of £300 million (over $700 million) had been charged and told UK card companies that default charges above £12 (around $29) would be presumed unfair. The OFT next investigated bank account charges and published its findings in 2008.
The OFT has the power to make these investigations under the UK’s Unfair Contract Terms laws.
Consumer action groups in the UK say thousands of consumers have been successful in reclaiming penalty fees from banks.
The New Zealand Commerce Commission is also investigating the level of credit card late payment fees there. Under New Zealand law, these fees must be ‘reasonable’.
'Fair go on fees' is a joint campaign by Consumer Action Law Centre and CHOICE to end unfair bank penalty fees.