There’s a wave of consumer action sweeping the UK that must have Australian banks feeling very nervous – their bluff is being called on penalty fees they have no legal right to impose.

It is now becoming clear that, at the very least, there’s a grey area about whether the numerous and very profitable bank penalty fees are legally enforceable. More likely, the fabulously profitable Australian cartel has been getting away with ripping hundreds of millions of dollars out of customers who’ve been fooled into paying fees that can’t been legally justified.

Seven’s Sunrise show this morning picked up on the British consumer groups’ campaign, which includes supplying templates for bank customers to claim back the ubiquitous penalty fees for such commonplace matters as slightly exceeding overdraft limits and late payment of credit card bills. A single story in the Independent apparently resulted in 20,000 people downloading claim forms in one day.

The British campaign was sparked by an Office of Fair Trading ruling last year that credit card penalty fees were illegal. The OFT is investigating other bank penalty fees as well, but consumers are making successful claims for the return of fees paid over several years without waiting for that ruling.

Helen Ainsworth, of the consumer group Which?, told the Belfast Telegraph: “We believe bank customers paid £4.7bn in unauthorised overdraft charges last year alone — many have already claimed back some or all of this money, with awards ranging from £70 to thousands of pounds.”

The irony for Australian bank victims is that there was an attempt to blow the whistle on penalty fees here in December 2004 that the banks successfully stared down.

Nicole Rich, supervising solicitor at Victoria’s Consumer Law Centre, conducted a study, “Unfair fees: A report into penalty fees charged by Australian banks” that could be the template for the British consumer action. The OFT has effectively verified the core of her report:

In Australia, it is a well established legal principle that a contractual term which requires one party to a contract to pay the other “innocent” party a sum of money upon a default or break of the contract is enforceable only if it provides for payment of a sum of money that is a genuine pre-estimate of the loss or damage suffered by the innocent party. This is sometimes called a “liquidated damages” term.

However, such a term is to be distinguished from a “penalty” term, which seeks to not compensate the innocent party but to penalise the other party for the break or default. Penalty terms are unenforceable at law.

The $30 late fee – on top of interest charges – for missing a credit card payment date is just such a penalty.

The Australian Bankers Association response to the argument is rather telling. When the Australian Consumers Association gave it a run in Choice two years ago, the ABA response ran thus: penalty fees are not illegal and all fees are disclosed to customers.

Which avoids the central issue: the fees may not be illegal, but it looks like they’re not legally enforceable either. It’s not illegal for me to tell you to send me $50 immediately – I just can’t legally enforce that demand. And, to steal a line from a British site, telling you I’m going to hit you in the head doesn’t make it legal for me to subsequently punch you.

The UK reports indicate the last thing the banks want to do is test the penalty fees’ legality in court. Sources have informed Channel Seven that one Australian legal challenge was contemplated but fell apart when discovery costs against the banks were estimated at $5 million.

Australia’s banks jealously guard the detail of their penalty fee income, claiming it to be commercially sensitive.

Over to the ACCC for some real action. Perhaps.

Disclosure: I was the interview talent for the Sunrise story using research by producer Paul Richards

Peter Fray

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