Banks could be forced to repay excessive penalty fees

Hold on to bank statements, because a landmark court case could force banks to pay back all those pesky and excessive "penalty fees".

Banks prefer to call them "fees for service" rather than penalty fees, there's a multibillion dollar reason why, but I'll explain that later.

Money first argued that these fees could be potentially unlawful in the September, 2004 issue's Beat the Banks story.

At the time Ben Slade, a partner at Sydney based law firm Maurice Blackburn Cashman, supported the argument by saying that the fees were, in fact, penalties imposed by banks on customers. "Banks should only be able to charge a reasonable establishment of the cost," he said.

Fast forward seven years and a class action against a major bank over penalty fees is finally under way. The case could determine that the fees are unlawful.

Thousands of disgruntled ANZ customers are suing the bank in what's believed to be Australia's biggest yet class action the group accounts for almost $50 million worth of the potential total damages.

To be fair, most banks have reduced or eliminated penalty fees. New "unfair contract" laws may have pushed them to act. NAB, for example, has ditched its $30 overdraft fee, Westpac has reduced its dishonour fee from $35 to $9 and Commonwealth Bank has cut its late payment fee on home loans from $45 to $20.

But this still doesn't necessarily mean that the new fees are a true reflection of the cost, nor is it a reason to excuse what's happened in the past. If Financial Redress, a division of listed litigation funder IMF and the firm behind this case, is successful against ANZ, about 10 other banks face similar action .

To date the holders of 245,000 plus accounts have registered with Financial Redress. Of these, more than 40,000 belong to ANZ customers.

Financial Redress managing director James Middleweek says the reason for starting with ANZ is simple: "They are the best representative. Their fees were high and fairly standard across the board."

He expects a judgement by the end of the year. The real issue is whether the court finds the charges to be penalty fees or fees for service.

If they are found to be penalty fees, then Financial Redress has a case. The banks will need to prove that the fees charged are a true reflection of the actual cost to the bank when a customer, say, allows an account to go into debit or misses a payment on a credit card.

Middleweek is confident that the court will see the fees as unfair and that they don't represent a genuine estimate of the costs. But if they are deemed to be a fee for service, as the banks argue, then it's not as clear cut.

As Westpac spokesperson Julie Quinn told Money in September, 2004: "The fee reflects the cost of providing the services. Not everything is automated and in a lot of cases individual assessments [as to whether something gets paid or not] are made."

ANZ's argument supports Quinn's quote. According to the bank, the fee isn't a penalty because customers haven't breached a contract. Rather, it's a fee for the service of deciding whether to extend the money.

What's considered a fair fee? Nobody is sure. As Middleweek says, "not even ANZ could answer that question in court".

Deutsche Bank analysis revealed that 87 cents in every dollar a big bank takes from a customer in penalty fees is pure profit.

So where to from here? If you have incurred at least one exception fee on any of your bank or credit card accounts, register at www.financialredress.com.au. There's nothing to pay unless you recover compensation. IMF funds all the costs, for which it will receive its money back and a 25percent share of any compensation.

And don't worry if you haven't kept all your statements. Middleweek says the onus will be on the bank to supply the details. You need only prove that you have been hit with an excessive fee at least once.

ANZ customers can still register.

"We can send in a supplementary list of complaints, but there's no guarantee that this will be accepted with those ANZ customers who have already registered," says Middleweek. Either way, it won't cost you anything. "No win, no fee," he says.

If the ANZ case succeeds, I say "look out telcos", because after it has finished with the banks my guess is that Financial Redress will have a good look at the telecommunications providers.

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