Family First Dissenting Report
Inquiry into the Australian Securities and Investments Commission (Fair
Bank and Credit Card Fees) Amendment Bill 2008
Families have nowhere to turn when they are slugged by
outrageous bank penalty fees, which is why Family First wants to ensure penalty
fees are for cost recovery rather than a blatant profit grab. The Rudd
Government has done nothing to help families struggling to pay bank penalty
fees of up to $50 a pop.
That's why Family First proposed new laws that would:
- Restrict penalty fees to cost recovery, to stop banks charging
penalty fees which are up to 92 times the cost of processing the customer's
mistake;
- Give the Australian Securities and Investments Commission (ASIC)
the power to ensure penalty fees reflect costs and investigate customer
complaints and issues referred by the Treasurer;
- Outlaw inward cheque dishonour fees;
- Stop penalty fees being charged because another bank charge has
pushed the customer over or under the necessary bank balance;
- Prevent penalty fees for customers exceeding their credit card
limit, where the bank does not give customers the option of a solid maximum
credit limit; and,
- Ban charging multiple fees for the same mistake.
Bank penalty fees can cost families as much as $50 for each
dishonoured transaction, with some paying multiple fees for the one mistake.
The inquiry heard evidence these fees are still rising.
There is not effective competition between banks to protect families from this
fee gouging.
Low income families are particularly and disproportionately
hit hard by penalty fees that may be as much as 20% of their weekly income.
Family First has an action plan that the Rudd Government
should take up, with amendment if necessary, to protect families from
outrageous bank penalty fees.
Bank penalty fees
Bank penalty fees range up to $50 a hit[1]
and charge customers for a number of mistakes, such as not having enough funds
to cover a cheque or a direct debit and going over a credit card limit. Some
customers pay multiple fees for the same mistake.
Choice and the Consumer Action Law Centre pointed out that:
In its 2007 Bulletin on banking fees, the Reserve Bank of
Australia (RBA) showed that total fee income earned from household deposit and
credit card accounts was over $4 billion in 2006. That represented a ten per
cent increase on 2005 fee income. Between 2002 and 2006 fee income increased by
45% on deposit accounts and a massive 140% on credit card accounts. The RBA,
however, does not collect data on income derived specifically from penalty
fees. The RBA did observe the steady growth in some category of fees. In the
case of credit card over limit fees, these fees did not exist in 2000 and now
average $30 each (and can be as high as $35).[2]
Further, the Consumer Action Law Centre and Choice said that
the cost to families of each penalty fee has increased rapidly in recent years:
Since 2005 Westpac’s transaction account penalties have
increased by 25-33% and its credit card penalties by 16-40%. During this time St
George credit card penalty fees increased by 40-50%. ANZ recently reduced its
dishonour fee from $45 to $35 but increased its overdrawn account fee from
$29.50 to $35.[3]
Rates have increased faster than inflation or other measures
that might have explained a change in costs to banks:
... rates just keep going up. They bear no
relation to costs. They go up way faster than the CPI; they go up way faster than the change in the volume of
banking business; they go up way faster than changes in wages. When fees are
going up 15 to 40 per cent over a two-year period, when new fees are invented
and rise from nothing to $50 over four or five years, competition works to this
effect: each bank jumps on board and says, ‘We can charge that kind of fee as
well,’ but it does not work to the benefit of the consumers. [4]
Bank penalty fees are clearly a significant cost to families
and those costs have skyrocketed in recent years.
Direct debit dishonour fees
There is a range of types of bank penalty fees, from cheque
dishonour fees to credit card over the limit fees, but the Committee heard that
direct debit dishonour fees, which cost up to $50,[5]
may be the most outrageous:
That is an automatic, electronic hit that happens. There is no
person taking any step in that process. Some banks choose to send a letter to
the customer to tell the customer that they have denied that transaction, but
in those circumstances it hardly costs the bank anything at all. In
circumstances where the person who gets hit with the fee has no money in their
account, they are substantially worse off. Fairly regularly we find
circumstances where they get hit with multiple fees.[6]
Direct debit dishonour fees are becoming more difficult to
avoid, with increasing numbers of businesses asking for this sort of payment,
which requires families to closely monitor their balance against automatic
deductions:
More and more businesses—not banks but other businesses—are
requiring consumers to have relationships with them which depend on direct
credit and direct debit payments. Instead of having maybe one or two direct
payments coming out of your account a month and one, your salary, going in, you
now have a myriad of payments going out of your account on a fortnightly basis,
a four-weekly basis, a monthly basis, a three-monthly basis—we charge our
customers three-monthly; so do a lot of businesses—or an annual basis. Once you
start getting a dozen or 20 regular payments coming out, it is much harder for
consumers to keep track. If you are on a tight budget, which perhaps 50 per
cent of Australian families are, it is very easy to make a mistake and not have
enough money in, particularly when it is one of those monthly payments that are
out of cycle with your wages.[7]
The Combined Pensioners and
Superannuants Association argued that the increased use of direct debits shifts
increasing levels of risk from businesses and financial institutions to
customers:
... customers are penalised for hiccups in the electronic payment
system, with penalties set at seemingly arbitrary levels without a thought for
whether the cause of such hiccups, mostly defaults, could have been avoided by
customers. [8]
There is a much higher level of risk from direct debit
penalty fees for low income families:
It is a lot more difficult for disadvantaged, low-income
consumers to access internet banking and things like that. The main problem
that we see is the requirement to pay by direct debit. It is not illegal for
the bank to require payment by certain methods. The theory is that, if you do
not like the payment options, you talk with your feet. The reality is quite
often different.[9]
The Brotherhood of St Laurence said that many low income
people, who may not have access to Internet banking, have to consider other
costly ways to try to keep track of their account:
We have many clients who do not want to check their balance at
ATMs because, depending on the account, the cost can be $2 for checking. This
means that they tend to play Russian roulette and just pray that their
withdrawal of funds will not overdraw their account.[10]
The Smith Family commented "the most common charges
that are of concern are direct debit fees."[11]
Direct debit dishonour fees are clearly a problem for people
across the board, but have a particularly big impact on lower income families.
Multiple fees
Choice and the Consumer Action Law Centre pointed out the
significant problem with "multiple fees charged on successive days for the
same breach, multiple dishonour fees charged on the same day and fees charged
because another bank charge has pushed the consumer’s balance over or under the
relevant limit."[12]
The St Vincent de Paul Society highlighted the difficulty
its clients face with multiple fees:
Exceeding a credit limit on a small credit card will attract one
fee while, at the same time, failing to make the monthly payment will attract
another fee. By not addressing a credit card debt for a number of months, they
can be consecutively hit with multiple fees that far exceed both the interest
to the bank, which is already high on the credit card, and any costs in trying
to deal with the small credit card debt. This pushes people further to the
edges and marginalises many Australians financially.[13]
When asked about customers hit by multiple bank penalty fees
for the one mistake, the Australian Bankers Association displayed an amazing
lack of awareness of the reality of penalty fees, saying "I am struggling
to think of an example where that might occur ... banks would not want that
situation to occur."[14]
But these situations do occur and are among the reasons for
Family First's bill.
Cost of failed transactions to banks
It is difficult to determine the exact cost of failed
transactions to banks, but the evidence is that banks may be charging penalty
fees which are up to 92 times the value of what it costs them:
The report, Unfair fees: a report into penalty fees charged by
Australian banks (the Rich Report), estimated the extent to which penalty fees
relate to cost ... Considering the data ... [in the submission] ... , the
institutions with the lowest dishonour fees (CBA, Westpac and ANZ), could be
charging nearly six times the cost to process. BankWest (with the highest
dishonour fee) could be charging over eight times what it costs to process a
dishonoured cheque ... the CBA, Westpac and ANZ (with the lowest direct debit
dishonour fee) could be charging over 64 times cost, and BankWest (with the
highest direct dishonour fee) over 92 times of what it costs them to process a
direct debit dishonour..[15]
In the Committee hearing the Australian Bankers Association
indicated that bank penalty fees do not just cover costs and that there is a
profit margin in penalty fees.[16]
Family First's legislation would require banks to give
details of the cost of transactions that trigger a penalty fee to the
Australian Securities and Investments Commission, which the Australian Bankers
Association claimed it would be "... an enormous exercise which, of itself,
would be very costly ... the issue is allocating those costs to particular
services and products. There may not necessarily be a science behind it".[17]
This admission shows bank penalty fees bear no relation to the cost of a
transaction to banks.
The banks also admitted they had not done any analysis of
what a fair level of fee would be:
No, we have not [done any independent analysis on a fair level
of bank penalty fees]. In fact, there is no collection of any information in
relation to exception fees and there has been no analysis done.[18]
Choice and the Consumer Action Law Centre stated:
We have come to the conclusion that the fees are excessive and
out of all proportion to the loss incurred by the financial institution. We
submit that given the sensitive nature of information about costs, that only an
independent regulator will be in a position to obtain and review this
information.[19]
Family First's plan would establish ASIC as the independent
regulator to determine bank costs and a fair level of bank penalty fees for
cost recovery.
Low income families
Low income families are particularly and disproportionately
hit by bank penalty fees[20]
and a number of welfare groups made submissions to the inquiry to point this
out.
Dr Falzon from the St Vincent de Paul Society explained why
his organisation had made a submission to the inquiry:
There was a very strong, in fact unanimous, indication from all
of those who were involved in financial or budget counselling that the people
that they were assisting were disproportionately impacted upon by the
prevalence of bank penalty fees.[21]
The Brotherhood of St Laurence explained the practical
effect of bank penalty fees on low income households:
Being on a tight budget means that low-income people have very
limited discretionary expenditure. The standard penalty fee for dishonoured
direct debits ranges from $35 to $50 and when low-income people are charged
these fees, they struggle with other important spending needs such as food,
rent and bills. For instance, a Brotherhood customer was recently charged
several penalty fees because of a misunderstanding of the direct debit system.
He said ‘$50 is food for a whole week for my kids. That little extra $50 that
they have charged, it's just shattered me. To someone on a disability pension,
$50 is a fortune.’[22]
The Smith Family described the impact on its clients:
The experiences of participants in our financial literacy
courses are consistent with research that indicates they are unfairly penalised
by financial fees and charges. In some cases these can constitute as much as
20% of their weekly income. The unfairness of bank fees and penalties is a key
theme consistently expressed by participants in our financial literacy courses.
The most common charges that are of concern are direct debit fees. Our families
are particularly concerned about the double penalty of an overdrawn fee from
the bank (typically $45-60) coupled with a dishonour fee from the merchant
($25-$60).[23]
Families can find it hard to pull themselves out of debt
when they are slugged with a penalty fee:
We also regularly see many genuine people struggling to repay
debts to financial institutions only to be hit with additional fees eg credit
card over the limit or late fees. These fees can cause additional stress and
anxiety for people who are earnestly trying to repay their debts.[24]
It does not make much sense to continue to hit families in
financial difficulties with exorbitant penalty fees:
... during our 25 years of financial counselling, we can say that
it is primarily financial difficulties that cause people to go over their
credit limit or make a late payment on their credit cards. These fees penalise
those who can least afford them.[25]
The banks claimed that fees are falling and there are more
products available that are low fee products.[26]
But the effect of any of these changes do not appear to have
been felt on the ground:
We see over 1,000 people a year. We run an advice line which is
free to all Western Australian consumers and they can just ring in and get
advice. People calling about bank fees is a significant pressure on our
service. I do not think that has significantly changed in the last year.[27]
Choice and the Consumer Action Law Centre put the case that:
Reduced rates for the most disadvantaged members of our
community are a very welcome initiative. However, not all institutions have
taken this step, and the fact remains that penalty fees for the majority of
consumers have increased.[28]
Banks should make particular efforts to help lower income
families to avoid penalty fees, but they also have an obligation to the rest of
the community to not charge exorbitant fees.
Helping families avoid penalty fees
Banks that are serious about helping families avoid penalty
fees can do a lot to help fix the problem:
There are a range of steps institutions could take, a few of
which are set out below. Some have adopted some of these ideas.
- offer customers the choice whether or not their credit cards
will have a hard limit (to avoid fees) or a soft limit (fees will be charged)
[now offered on some ANZ products]
- provide a free ‘safety net’ on transaction accounts [offered
by BankWest]
- provide real time notification to customers of the danger of missing
a payment. For example an email or SMS advising a payment is due tomorrow but
there are currently not enough funds available. The low costs of such a service
could be passed on to consumers who elect to take it up. [St George offers an
SMS notification service][29]
The St Vincent de Paul Society also stated that banks could
do more:
While there is a place for greater financial education, even a
highly educated money manager can fall prey to existing traps in the banking
industry. Banks must be encouraged to increase Australia’s status as a smart
country by finding technological solutions to prevent such events as ATM’s
authorising withdrawals beyond known bank balances, bank balances showing
uncleared funds or credit card “limits” being exceeded. Advances in such areas
will be slowed until banks are prohibited from obtaining penalty fees from
events where customers cannot control liability.[30]
Some banks have argued that people appreciate being able to
overdraw their credit card so they are not embarrassed when trying to purchase
something, but one welfare group says many people would appreciate the
assurance they cannot overdraw:
... we would say that a lot of the people we are dealing with do
not eat in restaurants and they are not going to get embarrassed; they would
prefer not to have that facility where they have the capacity to overdraw their
accounts.[31]
There is plenty of scope for banks to do more to assist
families to avoid bank penalty fees, rather than just blame their customers.
Current regulation
Regulation of financial services in Australia is focused on
disclosing fees, but according to the Australian Securities and Investments
Commission (ASIC), bank penalty fees are not among those things banks must
disclose:
The principal regulatory measure in relation to fees for
financial services, both at state and federal level, is the mandating of
disclosure. ... Many financial products (for example, insurance and
superannuation) are regulated by the Corporations Act and require a product
disclosure statement (PDS) ... [but] ... the financial products and services the
subject of the current public debate on default fees (that is, basic deposit
products and credit cards) do not require a PDS. For such products, ASIC’s
jurisdiction is limited to its ASIC Act role of ensuring that product providers
do not engage in misleading, deceptive or unconscionable conduct, either by act
or omission.[32]
Banks generally detail their fees, including bank penalty
fees, in booklets they produce on fees and charges. The Consumer Action Law
Centre and Choice argue that even if penalty fees are detailed in bank
publications, "disclosure, alone, does not mean that a fee is fair or
legal."[33]
But if families have a dispute with a bank over penalty
fees, there is no easy option for them to pursue that dispute. Customers with
deep pockets can take banks to court, but there is no dispute resolution in
place, with ASIC favouring light touch regulation and the Banking and Financial
Services Ombudsman not responsible:
The Banking and Financial Services Ombudsman has declared that
it is not able to take on such disputes. It has decided that its terms of
reference do not allow it to look at the specific issue of the level of the
penalty fee. Taking out the option of going to an external dispute resolution
scheme means that consumers are left to go to the courts if they want to pursue
action on the level of the fees that they have been charged. This is quite a
costly and high-risk exercise for consumers.[34]
Family First's plan for regulation of bank penalty fees is
to give ASIC the power to take an active role in ensuring bank penalty fees are
for cost recovery only. Family First's bill covers
banks, building societies, credit unions and other institutions that offer
credit cards.
Competition
The improved regulation detailed in Family First's plan is
important because there is not effective competition in the bank penalty fee
market:
... the crux of the problem is that market forces do not and
cannot work to solve this problem. Where features of a product do not appear to
be relevant to a consumer at the time they are making a decision on whether or
not to choose that product, then the market is not going to work to control the
prices. For the most part, when a consumer chooses a banking product they do
not intend to incur a default fee. They do not intend not to have funds in
their account when a payment is due. They do not intend to spend more on their
credit card than their limit. They do not intend to make their payments late.
So, as a consequence, a bank cannot gain a market advantage by offering a
product which has lower fees than its rivals. If it is going to reduce its
costs or its revenue, it is much better off doing that on its interest rate or
its up-front fees where there is more competition. So this is not a market
failure which is an information problem; it is not that consumers lack the
information about the products they are choosing. The issue is that the amount
of a penalty fee is not a relevant consideration for most consumers when
choosing the product.[35]
There is also little scope for customers to negotiate with a
bank on penalty fees charged before they sign up for an account – it is take it
or leave it:
... small consumers take contracts as they are given to them. They
do not have the opportunity to make adjustments. The proposition that a bank
enters into negotiations with a small retail customer, a household customer,
about the nature of their banking arrangements is not based in reality.[36]
An indication of the lack of competition
in bank penalty fees was the banks were able to quote their interest margins falling
from "... roughly four per cent to less than two per cent over the last
decade", but they were not able to quote their margins on bank penalty
fees. [37]
The Australian Bankers Association claimed market forces are
reducing penalty fees[38],
but seemed to be confusing market forces with political pressure and public
outrage. In this the banks want to have it their own way, with a high degree of
regulation protecting their place in the market, but with less regulation
protecting the interests of families against exorbitant bank penalty fees.[39]
But despite the banks' claims of lower penalty fees, it was
pointed out to the Committee that only some fees are lower, while "...
penalty fees for the majority of customers have increased."[40]
Conclusion
Families have nowhere to turn when they are slugged by
outrageous bank penalty fees, which is why Family First wants to ensure bank
fees are for cost recovery rather than a blatant profit grab. The Rudd
Government has done nothing to help families struggling to pay bank penalty
fees of up to $50 a pop.
That's why Family First proposed new laws that would make
the Australian Securities and Investments Commission (ASIC) responsible for
monitoring fees and ensuring they are for cost recovery only.
Family First has a plan that the Rudd Government should take
up, with amendment if necessary, to protect families from outrageous bank
penalty fees.
Senator Steve
Fielding
Leader of Family First
Navigation: Previous Page | Contents | Next Page