The decision by NAB to remove its $30 ‘exception’ fees for consumers who accidentally overdraw their savings accounts is a small consolation to bank customers who have been victim to one of the greatest corporate thefts over the past decade.

As Choice’s Gordon Renouf noted in Crikey yesterday, since the turn of the millennium, exception fees have become an increasingly powerful profit center for the big four banks – last year, more than one billion dollars was ‘earned’ by the banks through penalty fees. (Given the banking sectors average price-earnings multiple of around 11, arguably more than $10 billion in market value exists purely due to the imposition of fees).

While the Australian economy is littered with monopolies and cartel-type behaviour (Australia’s telecommunications industry is amongst the most expensive in the world, grocery retailing is a virtual duopoly) few industries are able to generate billions of dollars from transactions which are simply not in accordance with the law.

As this correspondent successfully submitted to the Victorian Civil and Administrative Tribunal last year, the imposition of penalty fees, which NAB have so ‘generously’ have agreed to partially withdraw, are contrary to basic common law contractual principles.

That is, a contracting party cannot simply another person a unilateral fee for an alleged breach which bears no resemblance to the actual loss suffered. In the case of exception fees, when a consumer briefly overdraws an account, the bank is entitled (and will) charge a high level of interest on the overdrawn amount. Given the bank suffers virtually no other related costs (the breach would simply require a computer entry), the $30 or $50 fee charge is effectively entirely profit to the bank — it is not in any way a reflection of the actual loss suffered.

The reasonable question to ask therefore is how have banks been able to get away with swindling billions of dollars in fees from its customers over more than a decade when the common law deems such actions to be illegal?

The answer is simple — by spreading a relatively small cost on a very large number of people. Behavioral studies confirm that only a tiny proportion of victims ever take action to recover the sums involved (and for that very small percentage, the bank can simply pay the charge back). Further, the banks are well aware that to legally challenge a fee (no matter how outrageous), even in a Small Claims jurisdiction like VCAT, the cost for a complainant is upwards of $50 ($33 for an application fee and $18 for a required company search). Given most penalty fees are for around $40 — and small claims tribunals generally do not provide for the repayment of costs to the winning party, it is not commercially viable for most consumers to pursue their bank legally no matter how egregious the fee.

In addition, not only is it practically difficult to challenge a bank fee, but the fee itself is imposed automatically and secretly by the financial institution, invariably, by direct debit to the customer’s account. Further, the quantum of the fees is determined solely by the institution, under a contract which permits the bank to arbitrarily decide how much the charge should be.

Unlike in the United Kingdom (where the Office of Fair Trading is conducting a High Court challenge to the legality of penalty fees, the Australian Consumer and Competition Commission has stood by and acquiesced for a decade while powerful banks treat customers with utter contempt.

In fact, not only has the ACCC taken no action to curb penalty fees, but the ACCC and its chief, Graeme Samuel (who, as a former corporate lawyer and investment banker is yet to meet a bank merger he doesn’t like) did nothing to prevent the CBA from taking over BankWest or Westpac from purchasing St.George. Those acquisitions, along with the downfall of the non-bank lending sector as a result of the global financial crisis, significantly reduced the already minimal levels of competition existing in the sector.

While the NAB’s gesture is a start, it is clearly not a comprehensive move to reduce all illegal fees charged by all the large banks. Nor will the Federal Government’s impending ‘unfair contract’ legislation, which was introduced to Parliament in June, and is expected to be enacted in early 2010, be a silver bullet which prevents illegal penalty fees from being wantonly enforced by banks. Such legislation is already in existence in Victorian and UK and that has not prevented financial institutions from imposing billions of dollars in fees in those jurisdictions.

Given the ACCC’s reluctance to act on behalf of Australian consumers, it is time the Federal Government properly acted with legislation targeted specifically at banks, requiring institutions to provide complete evidence of the costs involved to the bank if a customer overdraws their account or fails to make timely payment of a minimum credit card debt repayment. Unless the institution can prove the costs involved, they would not be able to impose such charges onto account holders.

With consumers powerless, and regulators hopeless, it is time for the Federal Government to take active steps to stop illegal bank fees entirely.