Prime Minister Abbott tells us ‘Australia is open for business’ but the recent spate of class actions only increases risk for all businesses, particularly financial service providers.
August 2014 saw the largest class action in Australia commenced claiming credit card late fees of up to $35 are a penalty, extravagant, and unconscionable and should be refunded. The claim applies to fees stretching back many years, possibly beyond the normal six year limit for claims.
This case follows close on the heels of a similar case brought against ANZ also regarding default fees.
Of course the popular press and consumer advocates strongly support the cases and jump on board seeing it as an opportunity to profit. This ‘me too’ ignores the fact that the vast majority of people pay their obligations on time. It is only fair and proper that there is a significant disincentive to borrowers defaulting.
It is unpopular to say so, but the fact remains that the user pay principle should apply. It is simple enough to ensure that instalments are made on time by lodging a direct debit authority and arranging your affairs accordingly to cover your responsibilities. Just imagine how much cheaper operating costs would be if banks did not have to worry about people defaulting.
From my perception this attack on default fees is just another way in which the responsible members or our community are asked to subsidise the irresponsible.
I accept that there are some cases where default fees are too high or are levied inappropriately, but where that occurs individual borrowers already have access to external dispute resolution schemes at no cost to hear their grievances.
I am a great advocate for consumers’ rights having served nine years as a director on one of the ASIC approved external dispute resolution schemes, but I am not an advocate of greenmail. There is a material risk that class actions can be used as a form of greenmail. The company being sued knows win, lose or draw, it will be up for significant legal fees that it probably will not be able to recover.
There are circumstances where financiers should pay compensation, but there must be a better way than expensive court proceedings in which often the biggest winners are the lawyers.
These cases allege that lenders should only be able to recover their actual cost arising from the default. However, the way that cost is likely to be measured is entirely misconceived. The entire cost of the relevant department of the lender including all overheads needs to be taken into account. If customer performed their legal obligations, the entire department would not be needed.
If Australia is to be truly ‘open for business’ we must be able to have more certainty that the contracts customers sign are enforceable in accordance with their terms, rather than being faced with the risk that this or that provision will be considered unjust, unconscionable, or a penalty. What happened to ‘buyer beware’ and ‘sanctity of the written contract’. Uncertainty is bad for business and bad for Australia.
This article was first published in the Australian Financial Review on 15 August 2014.