In brief
Banks and service providers have won a significant battle over late credit card payment fees of up to $35 following a recent High Court decision.
What you need to know
- When addressing whether a fee is a penalty, the High Court affirmed that a service provider should assess the fee against the greatest loss that could conceivably flow from a defaulting customer.
- Customers should review the terms of their service provider contracts carefully before entering into them and raise any concerns about the amount of default type fees before they enter the contract.
Background
Marking the end of a three year class action against the Australia and New Zealand Banking Group Limited (ANZ), a High Court ruling has confirmed that the ANZ bank was entitled to charge late payment fees of up to $35 to its customers.
Mr Paciocco, an ANZ bank customer, held two consumer credit card accounts with the ANZ. The terms and conditions of the accounts required Mr Paciocco, following receipt of a monthly statement of account, to pay a minimum monthly repayment. If the minimum monthly repayment plus any amount due immediately was not paid within a specified time, a late payment fee was charged. The late payment was $35 before December 2009 and $20 thereafter. Mr Paciocco was charged a total of 26 late payments fees.
Mr Paciocco commenced proceedings against the ANZ in the Federal Court of Australia in 2013, in which he alleged that the late payment fees, and various other fees charged by the ANZ, were unenforceable as penalties. He also claimed that the late payment fees were unconscionable and unfair under the Fair Trading Act 1999 and unjust under the National Credit Code.
Federal Court’s decision
At the hearing, expert evidence was adduced as to the losses suffered by ANZ upon Mr Paciocco’s failure to pay amounts owing on his accounts by the due date. Mr Paciocco’s expert focused on the amount needed to restore ANZ to the position it would have been in had Mr Paciocco paid the amounts on time. Contrary to this, ANZ expert evidence was directed at the costs that could be incurred as a result of Mr Paciocco’s late payment, which included loss provision costs, regulatory capital costs and collection costs.
The primary judge agreed with Mr Paciocco’s expert and held that the late payment fees were penalties because, amongst other things, they were extravagant and unconscionable in comparison with the actual loss suffered by ANZ.
On appeal, the Full Court of the Federal Court overturned the decision of the primary judge and held that the late payment fees were not penalties because, amongst other things, the costs incurred by the Bank were affected by loss provision costs, regulatory capital costs and collection costs.
High Court’s decision
Mr Paciocco’s appealed the Full Court’s decision to the High Court in 2015. However, the High Court dismissed the appeal and agreed with the Full Court that the relevant costs to be considered included loss provision costs, regulatory capital costs and collection costs.
Conclusion
The principles of this case can apply to other service providers, including energy and telecommunication companies who charge similar default type fees to customers.
Customers should review the terms of contracts carefully before entering into them and any concerns about the amount of default type fees should be queried at the outset.
Service providers should also act cautiously when calculating any default type fees, and ensure that the fees are a realistic estimate of the actual and potential costs that may be incurred if the customers default continues.
Case references:
Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50
Paciocco & Anor v Australia and New Zealand Banking Group Limited [2016] HCA 28
