It has taken more than a decade but finally, a serious Australian legal action has been launched against 12 of Australia’s largest financial institutions for alleged fee gouging. Financial Redress, which was recently acquired by ASX-listed litigation funder IMF Australia, yesterday announced that it is pursuing a class action against Australia’s largest banks.

The claim is being run by Maurice Blackburn, which has acted for plaintiffs in several large class actions, including the Longford Gas explosion and GIO shareholders. Banks involved in the matter include CBA, NAB, Westpac, ANZ, Citibank, Bendigo Bank, HSBC and Suncorp.

The basis underlying the class action is that many of the fees charged by banks, including charges for late credit card payments, exceeding a credit card limit, overdrawn accounts and direct debit dishonors are not permitted under contract law (and possibly, state-based consumer legislation such as the Fair Trading Act).

It is alleged that the quantum of fees imposed by banks does not represent “a genuine pre-estimate” of the costs incurred as a result of the consumer’s breach. While many fees charged by banks are about $40, according to the Wallis Final Report of the Financial System, the actual cost to financial institutions would be most likely less than $1.  A similar study by the Consumer Federation of America estimated that the cost to process a dishonored direct debit was between $US48-65 cents.

Further, the bargaining position between a financial institution and its customers is not an equal one. For a start, there is a substantial inconvenience and cost for bank customers should they wish to change banks (customers have a large number of direct debts attached to their account, and the process of setting up a new account can often be time-consuming). Also, the manner in which the exception fees are applied (by direct debit to a customer’s account, without any avenue of appeal) further indicates a grossly uneven bargaining position.

Financial Redress states that in 2008 alone, banks charged customers more than $1.2 billion in fees, and noted that “when a class action is commenced in the court, it will be seeking to recover all exception fees you incurred over the six years with that bank prior to the commencement of the case, together with accrued interest. Although each claim will depend on the precise level of our losses, our previous experience tells us that a typical consumer claim might be $1000-$2000 and a business claim might be $3000-$6000.” While this amount sounds high, the claims of bank customers would also include interest on the fees charged.

The arguments proposed by Financial Redress will not be completely foreign to Crikey readers. In 2007, the author launched a legal claim based in the Victorian Civil and Administrative Tribunal and successfully obtained an (undefended) declaration that a penalty fee imposed by Citigroup was not lawful. A summary of that case can be found here and was based on the principle that fees charged by banks bear no reflection of the cost to banks as a result of a customer’s breach. Further, for many of those breaches, such as late payment of credit card balances, banks are able to charge extraordinarily high interest rates on the amount owing regardless of the penalty fee imposed.

Since that case was heard by VCAT, it is understood that several large banks have obtained high level legal advice from leading law corporate firms as to the legality of bank fees and possibility of subsequent legal action, like that being initiated by Financial Redress (and which have already occurred in the US and Britain).

While some financial institutions reduced the quantum of fees imposed in 2009, Financial Redress stated that “the incidence of these fees is still widespread. For example, banks still have punitive ‘late payment fees’ or ‘over-limit fees’, and many personal and business account holders still pay ‘overdrawn fees’. Where the banks have reduced these fees, they haven’t compensated customers for the over-charging they were doing before.”

The founder of Financial Redress is British-born corporate lawyer and stockbroker James Middleweek. Now based in Perth, Middleweek established Financial Redress last year.  If the claims are successful, Financial Redress and IMF will impose a 25% commission on an compensation received, with the proceedings being conducted on a “no win, no fee” basis.

As a result, before administrative and legal costs, it is feasible that IMF could walk away with upwards of one hundred million dollars if the claim is successful.

Banks shares dropped by about 1% yesterday after news of the class action was reported.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey