IMF whip up fee frenzy

The public relations machinery for litigation funder IMF (Australia) clicked into gear yesterday, delivering the firm extensive coverage in the mass media for its plan to launch class actions against banks for charging unjustified penalty fees over six years.

IMF disclosed yesterday that it was now the owner of the firm Financial Redress, one of a few outfits that earn a living writing to banks on behalf of clients complaining over penalty fees and in some cases getting some of the money back.

The essence of the Financial Redress case will be that the fees charged by banks (and credit card companies that IMF has also targeted) are out of all proportion to the true costs incurred by banks.

This is a familiar line of argument and one that is not that well supported by case law.

The only specific case on penalty fees resolved in Australian courts found in favour of the bank (or, in this case, Police Credit Union).

The deputy chief magistrate in South Australia ruled in that case (late last year) that the plaintiff failed to prove that the fees were so disproportionate to the actual costs incurred by the credit union as a consequence of the breaches as to amount to penalties.

The magistrate also found that while the account terms were not negotiable, there was no pressure upon the plaintiff to choose the credit union. He also found that the credit union's contract terms and fee structures were "available and quite easy to understand."

The Financial Redress case will otherwise turn on the legality and unfairness of penalty fees.

Campaigners (such as the Consumer Action Law Centre in Victoria) have argued for years that penalty fees were many times the actual cost of the damage suffered by the bank for their customer's trivial breach of contract (by overdrawing an account or neglecting to make a payment by a certain date).

One relevant case from Britain ended late last year in a win for the banks over the Office of Fair Trading after years of skirmishing over the fees.

In the end the banks won the case in the Supreme Court over the powers of the OFT rather than the underlying issue of the level of penalty fees. The original High Court ruling found the contested fees were not penalty fees, leaving aggravated consumers to pursue their banks over questions of fairness.

IMF no doubt has ample advice that its case stacks up under Australian law.

On the other hand, banks in Australia took steps to reduce (and in the case of NAB, eliminate) many penalty fees in late 2009 for business reasons unrelated to the risk of being found to have charged several billion dollars worth of unlawful penalty fees over the years.

It's hard to see banks ever settling with IMF whenever this class action proceeds, so it will probably churn its way through the courts, and appeals, for years to come.