The Full Court of the Federal Court has upheld ANZ’s entitlement to charge various fees including, late payment fees under ANZ’s terms and conditions with their customers.
In doing so, the Full Court of the Federal Court has dramatically overturned an earlier decision in February 2014 that found a number of bank fees were in the nature of a penalty and could not be justified and/or ought to be substantially reduced.
Key findings of the Full Court of the Federal Court
The key findings of the Full Court included the following:
- The contractual entitlement of ANZ to charge late payment fee could not be characterised as a penalty as the fee was not extravagant, exorbitant or unconscionable.
Accordingly, there was no issue as to whether the fee was a ‘genuine pre-estimate of damage’.
- When considering ANZ’s entitlement to charge a fee in its contract, it was necessary to look forward to assess the greatest loss that could be conceivably proved by a breach of the provision in question, in order to assess whether the fee was exorbitant, extravagant or unconscionable.
- It is not necessary for a bank to prove actual damage to justify a late payment fee.
- The onus to prove extravagance and exorbitance is with the bank’s customer. It is not the bank’s onus to disprove exorbitance and extravagance at the time of entering into the contract.
- In considering the evidentiary question as to the maximum conceivable loss, the court had regard to ANZ’s expert evidence setting out ANZ’s financial loss which involved considering the ‘greatest possible loss and the economic interests of the bank that need to be protected’.
- In doing so, the court accepted ANZ’s evidence that dealt with the following matters in justifying the charging of late payment fees, namely:
- An increase in ANZ’s loss provision
The court upheld ANZ’s entitlement to claim, as part of its loss ‘the legitimate business costs’ for which a fee can then be imposed on a customer. The risk caused by late payment, is a legitimate object of commercial interest for protection by compensation. The fact that a degree of risk is reflected by the interest rate charged does not prevent banks from also assessing the costs that flow from late payment and the impairment of the value of the assets and earnings.
The court noted that it was appropriate to adopt a ‘looking forward analysis’, when considering a provision that resulted in impairments to the balance sheets and the profit and loss accounts to the bank.
- An increase in the bank’s costs of regulatory capital
The court found that as a deposit taking institution ANZ is required to hold regulatory capital which is not available to be put to use to earn normal banking returns.
As loans become impaired there is a need for further capital to be set aside. Regulatory capital returns less than other capital. As the breach of the contract can cause a bank to withdraw funds from circulating capital, then that is a loss worthy of compensation and is worthy of protection.
- Collection costs
The court again emphasised the need to look at the greatest possible loss on a forward looking basis and to consider the collection costs on an averaged basis, not by reference to a particular breach by Mr Paciocco.
The court concluded that the provisioning costs, regulatory costs and collection costs are matters that are relevant to the possible loss of a bank.
The court also dealt with other fees, including the following:
- The savings honour fees
The court determined that this was charged appropriately. In doing so the court was impressed by the evidence of ANZ’s Credit Risk Manager who gave evidence that the point of the exception fees was to “make sure people were fulfilling their obligations to keep their accounts in order which was important to the bank”. The fee could not be seen to be as a disguise for a penalty. There was a contractual benefit to Mr Paciocco.
- Overlimit fees on card accounts, non-payment fees, business honour fees
The court concluded that there was no evidence to establish that these fees were charged on the basis of a penalty.
Statutory unconscionability and unfair terms allegations also rejected
The court upheld the earlier decision that there was no basis for the fees to have offended relevant statutory provisions in the ASIC Act, Fair Trading Act (Vic) and National Credit Code.
In doing so, the court noted that Mr Paciocco understood the fee provisions and his evidence was that it was convenient for him to manage his accounts close to their limits and take the risk that he would overdraw his accounts and incur fees.
The court noted that there was nothing in ANZ’s actions that constituted any unconscionability or unfairness.
ANZ had acted honestly, the fees were fully disclosed, the applicants were not vulnerable, the fees could be avoided by the customer by not being in default and the customer chose to run their affairs by risking the fees. There was no lack of good faith by ANZ.
The Full Court judgement is good news for banks and other financiers. Large corporations in other industries who seek payments under their contracts will also benefit from this decision.
It upholds the contractual provisions that entitle banks to charge fees and rejects any contention that they are in the nature of penalties so long as they are either fees for service or if relating to breach not excessive or unconscionable. The court accepted that banks incur considerable costs in conducting customers’ accounts that go into default and that the fees that were charged by ANZ were proper having regard to the provisions of the contract, the conduct of the customer and the actions of ANZ having to manage accounts that are in default.
The decision is subject to a likely appeal to the High Court. However, it is to be applauded in its practical and commercial approach. It is hoped that the High Court will follow this approach.