Your Voice

The past week brought us a new report of record bank profits fuelled largely by penalty fees being imposed by the banks against credit card customers. These penalty fees are charged at startlingly high rates &emdash; on the order of $40 &emdash; for late payments and for exceeding the credit limit. Most customers who incur these fees just pay them, but the dirty little secret that the banks do not want you to know is that these fees are illegal. You are under no obligation to pay them, and if they were to try to enforce them in a court they would lose.

The over limit fee is particularly insidious since the bank is the party that is in breach of the agreement when the account goes over the limit, or at the least it is equally in breach with the cardholder. The credit limit is not there just to protect the banks, it is there to help the customer control their spending. In the old days the banks would not allow the card to go over its limit, and in modern times when almost every credit card transaction is online, it would be a simple matter for them to decline transactions that would result in the limit being exceeded. They actually allow the limit to be exceeded specifically to get the benefit of the penalty fees and any excess interest payments the customer occurs because their spending has exceeded what they can comfortably manage.

The banks have tried to claim these fees are legal because they have been disclosed to customers, but disclosure is entirely irrelevant. Even if customers had the fees tattooed to their foreheads backwards they would be unenforceable.

There is a well established principle of contract law that while you can agree on the price of a service, any penalty for breaching a contract must reflect the cost to the other party of the breach. Penalties that are significantly in excess of the cost to the other party are called "in terrorem" penalties, and courts treat in terrorem penalties as entirely void.

A bank incurs no real costs when a customer exceeds their credit limit. Additionally, if the bank were to incur costs from the excess of the credit limit, they would be unlikely to recover those costs in a court because the bank always had the option of declining the transaction in excess of the credit limit, and having failed to do so they have not mitigated their damages. Contract law requires that the wronged party mitigate their damages, and where they fail to do so they can only recover the amount they would have lost if they had properly mitigated those damages. Since the banks would lose nothing from over limit transactions if they declined those transactions, they could not recover damages for them in a court at all. This means that the maximum amount banks could charge for exceeding the credit limit is zero &emdash; anything else is "in terrorem".

Late payments are in a similar position. The bank incurs no costs unless the payments are seriously late. Anything less than 60 days late is unlikely to cost the bank anything at all. Even if it were to cost them, they will have been charging interest throughout this time so that they will make more income as a result of the late payment than they otherwise would have. Once again, the maximum amount they could legally claim as a penalty is zero.

It is important to distinguish here between a fee for service and a penalty. If these payments were a fee for service they would be permissible, but as a penalty they are in terrorem and illegal. The difference is that the credit card contract specifies that you must pay by the due date, and that you must not exceed your credit limit, and the fees are penalties for the breach. If instead the contract said you can pay at any time, but if you pay after the due date you pay the fee, and that you can use any amount of credit you like, but if you exceed the "limit" you pay the fee, these would be fees for service. On the other hand if the terms of the credit card contract said you can pay of the card "when you feel like it" and can use any amount of credit you like, as far as I am concerned they could make these fees a million dollars and I would pay off my 50 gazillion dollar balance (and rising) when I felt like it, which would be around the same time as hell froze over.

So why do the banks continue to do this? Because they can. They rely on two factors for this. The first is that most of the public is ignorant of their rights in relation to these fees &emdash; the banks intentionally mislead their customers into believing the fees are enforceable. The second is that they know that the people who incur these fees are the very people who cannot afford to contest them &emdash; rich people never have to pay them since they have limits that no reasonable person could exceed and pay off their card by automatic transfer on the due date. Only people with poor access to justice cop these penalties.

As a matter of principle, when an industry is behaving in this way and the victims are not in a position to protect themselves, the government has a role to intervene. This requires establishing some provision of law that brings the case within the scope of some government enforcement provision.

In the case of banks, because they are misleading customers into believing these fees are enforceable, they are engaging in misleading conduct in contravention of sections 12DA and 12DC(g) of the Australian Security And Investments Commission Act 2001 (Cth) (the ASIC Act), and are arguably also in breach of section 12DM.

A breach of section 12DC(g) or 12DM of the ASIC Act is an offence under section 12GB punishable by a fine of $220,000 for individuals and $1.1million for corporations. This fine would be on top of any order to repay all illegal fees collected, and such an order could be made under section 12GM.

Even a breach of section 12DA of the ASIC Act, which is not an offence provision, would give anybody at all the right to bring an action for an injunction under section 12GD requiring the banks to refrain from charging such fees and to refund any fees already taken. While it is unrealistic to expect any individual to go to the expense of court action, any action in which the general public is being massively ripped off in aggregate but in each case is being ripped off in an amount that is too small to litigate is the very kind of case where Government enforcement is most appropriate.

Given that these provisions are in the ASIC Act it should come as no surprise that the Australian Security and Investments Commission (ASIC) has primary responsibility for enforcing the Act. The real question is why they have not done so. The answer may lie in the fact that the banks are among the biggest donors to the major political parties in the nation, and although ASIC is supposed to be an independent body, the Government has been known to lean on independent enforcers in the past to prevent them taking action. On the other hand it may simply be that ASIC does not care about misconduct by banks and would rather look after company and securities fraud. Either way the situation is unacceptable &emdash; ASIC should have taken action against in terrorem penalties imposed by banks long ago. Instead the banks have been allowed to increase the penalties to a level where they account for a significant chunk of their record profits.