Penalty fee test case lumbers into court

A much-anticipated class action brought by entrepreneurial litigators against ANZ over the validity of exception fees will take centre stage in the Federal Court in Melbourne this morning.

If successful, the IMF (Australia)-funded action on behalf of 34,000 claimants will have wide-ranging implications for the banking industry and open the way for a series of claims against most of the country's deposit takers and credit card issuers that have levied exception fees over the last six years.

While the present claim against ANZ is for recoveries and compensation of around A$50 million, the case could potentially force the industry to cough up more than a billion of dollars, should the plaintiffs establish their case.

Moreover, the final bill could look even uglier for the industry if the Federal Court decides that similar claims can be made by customers who paid exception fees as far back as 1990.

Exception fees are mainly levied by banks and credit unions when customers exceed spending limits on credit cards or when they have insufficient funds in a deposit account to service loans or meet third party payments. They appear on customers' statements as "overdraw fees" or "dishonour fees".

This week's hearings, which may last until Thursday, will focus on whether ANZ is able, under Common Law of Contract, to characterise exception fees as "fees for service" rather than as penalties against customers.

The hearings are thus about questions of law rather than a trial to assess the evidence around fees charged and costs incurred - matters that will be dealt with by the court at a later date in 2012.

Maurice Blackburn, the law firm acting on behalf of the plaintiffs, will argue that the exception fees are penalties that have not reflected ANZ's cost of managing overdraws and late payments on accounts.

Neither ANZ nor the other major banks have explained in any precise detail the cost components that underpin the calculation of exception fees.

The problem for the banks is that they are now differentiating the calculation of dishonour fees according to the type of account a customer holds or the amount of income they earn.

This is a problem because the formula for determining dishonour fees is clearly not exclusively tied to the cost of managing overdraws and credit limit breaches.

In an effort to quell the public backlash against exception fees, a number of banks in the last three years have abolished exception fees on pensioner accounts.

National Australia Bank in 2009 abolished a number of exception fees. Most banks then lowered, rather than completely abolished these fees (often from around $30 to around $10 or less.)

Another curious feature of the calculation of exception fees is that they began to reduce across the whole industry during a 24-month period beginning in 2006.

According to a fact sheet issued by the Australian Bankers' Association in 2009, the dramatic decline in the size of dishonour fees was not attributable to cost reductions but to "the dynamic play of competitive market forces".  In other words, the banks have been adjusting exception fees as part of price competition.

In a television interview earlier this year Westpac chief Gail Kelly cast doubt on her bank's previous formula for calculating overdraw fees which she asserted had been "completely inappropriate''.

IMF and Maurice Blackburn began recruiting claimants to the class action in May 2010.

IMF will defer until next year decisions on whether to bring class actions against any other banks.