In what could be a legal first in Australia (a UK judge is currently deciding a test case on a similar issue and is expected to deliver his judgment in the coming days), the Victorian Civil and Administrative Tribunal has held that a $40.00 late payment fee imposed was an illegal penalty and therefore unenforceable.

The Tribunal also agreed with my submission that the fee amounted to a breach of the Victorian Fair Trading Act. (It should be noted that Citigroup, the respondent to the action, did not attend the Hearing and make any submissions. Citigroup did however pay the claim in full prior to the Hearing).

Your correspondent submitted an application to VCAT in late 2007 year seeking a declaration that a late payment fee (of $40.00) which had been directly debited by Citibank was unenforceable. The application can be viewed here. While the legal reasoning is too lengthy for this article (and was largely based upon Victorian Consumer Law Centre solicitor, Nicole Rich’s, excellent Report Into Penalty Fees) it essentially stated that: 

  • Any fee charged by a financial institution must be a fair reflection of the loss suffered as a result of the customer’s breach;
  • A fee of $40.00 for failing to pay an outstanding credit card balance (as well as interest charges approaching 20%) is not a fair estimate of the financial institution’s loss – rather, the fee is a profit generator for the institution; and
  • The relative bargaining positions of the parties is grossly uneven, with the institution able to directly charge any fee it sees fit without any course of appeal or mitigation by the customer.

The application sought damages of $135.00 for the “illegal” penalty fee plus associated costs. As noted above, Citigroup paid the damages in full prior to the hearing by directly depositing the money in the my credit card account but did not seek to defend the matter in VCAT. While VCAT decisions don’t set precedents in the same way as the Supreme or High Court decision does, the fact that a full-time VCAT member provided a judgment noting that the bank-fee charged was unenforceable and amounted to an unfair term in the contract is an indictment on the conduct of a financial institution. While Citigroup did not defend the matter, the VCAT member would have been within his rights to dismiss the application if he was of the opinion that it was without merit.

Based on the Tribunal’s finding, and Citigroup’s willingness to settle the claim, it is possible that any bank customer who receives a bank fee above a nominal amount could adopt the legal reasoning above and seek an immediate refund of the fee imposed, plus any associated costs relating to the application. If financial institutions have to refund a significant percentage of fees imposed they may even stop charging fees at all.

Citigroup can appeal VCAT’s decision in the Supreme Court of Victoria. However, in doing so, it would run the grave risk of setting a formal precedent should the Supreme Court uphold the finding of VCAT. 

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Peter Fray
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