Win could be costly

Stephen Franks thinks ANZ could lose the class action against its fees but warns that it could be a costly victory:

The foundation of the action against ANZ is a general contract law principle, not a specific banking law matter. It claims that the banks have been penalising unauthorised overdrafts and other breaches of contract, instead of just charging what they have cost the bank to deal with. I think the action is more likely than not to succeed because our law has always been against penalties in contracts. You can agree in advance on what happens if a contract is breached, if it is a genuine pre-estimate of the likely costs of fixing the breach. But if it is just a penalty, ancient law says that provision is not enforceable.

It is actually an  inefficient rule that probably costs consumers more than it saves them. Penalties are a standardised disincentive. The cost of handling thousands or millions of actual calculations of what an overdraft limit breach might actually cost the bank could be huge. And in the long run such costs become part of the overhead that is charged to everyone, those who do not breach as well as those who do. . .

If those taking the case win, people who breach their contracts with a bank will be charged less and the rest of us will all pay for it.

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5 Responses to Win could be costly

  1. Roger says:

    I’m no supporter of banks and their fees but I think this action is simply a case of the lawyer spotting the fat duck on the pond and fashioned a case to shoot and retrieve it. Stephen’s view of the reaction from the action is apposite.

  2. Dave Kennedy says:

    What ever the result it is useful to have some scrutiny of how banks operate. The world recession we have been experiencing is largely because of loose regulatory controls over bank practices and trillions of dollars were needed to bail out banks in the US. If banks were treated as ordinary businesses this would not have happened.

    Banks used to provide a service and were careful not to push people into debts that were unmanageable but it is obvious that they are now more interested in profits than service. The four Australian owned banks that dominate our banking system are some of the most profitable in the world and legal action had to be taken a couple of years ago to claw back $2 billion in avoided taxes.

    There has been much criticism of Russel Norman’s suggestion of using Quantitative Easing and yet while this was ridiculed as just printing money, this is exactly what banks do when they provide loans and they profit hugely by doing so.

    I recently talked to someone who worked for a Credit Union bank and they told me that they may earn a lot less than in an equivalent role in one of the Australian banks but at least they exist to serve their customers.

    I also remember when we had young children and struggling financially and although we budgeted well and we were very careful, we kept being caught by unnecessary bank charges. I remember one time that a pay arrived later than usual and the payments that were supposed to come out immediately afterwards couldn’t be honoured. We had no idea that this had happened until we got a bank statement full of penalty charges some time afterwards. Most people are not willfully breaching contracts with banks as you suggest, Ele, in many cases, like our own experience things happen despite best intentions and the penalties the occur can be devastating to some.

    We now bank elsewhere and if anything unusual happens in our accounts we get a personal phone call and the opportunity to manage the situation without a penalty.

  3. Paranormal says:

    You might wish to check your recent history. The recession is not the result of banks operating in too light a regulatory environment – rather it is a result of government meddling in banking markets.

    As a result of US legislation forcing banks to loan money to people that could not afford to pay it back the ‘sub-prime’ market developed to try and pass on the toxic debt. Someone was always going to wear the consequences of supposed anti discrimination regulation. Turns out it was the global economy. Thank you Carter and Clinton.

  4. Dave Kennedy says:

    You are partly right, Paranormal, but it was the banks that used this policy to feather their own nests and controls that should have still existed were not followed as bad loans rolled in and were hidden and managed dishonestly. Remember when banks got bailed out, many decided that rather than use it all for genuine purposes, many decided to pay their management bonuses instead.

    Clinton (and Bush who followed) may have been misguided in their approach but it was the banks that grabbed the opportunity to build excessive profits for themselves and use complex systems to hide the insecure nature of it all:

    “While the housing and credit bubbles were growing, a series of factors caused the financial system to become increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. Shadow banks were able to mask the extent of their risk taking from investors and regulators through the use of complex, off-balance sheet derivatives and securitizations.” (Wikipedia)

  5. Paranormal says:

    How can the root cause of the problem be “partly right”.

    You can’t blame the banks for operating in a regulated environment as best they can. Relieving themselves of toxic debt was a valid way of doing that. End of story.

    Crackpot regulation was at the heart of the problem and saying otherwise is just political spin to try and divert attention from the real issue. Spare us the greedy bankers talk which comes back to the left trying to pin the blame for the GFC other than where it belongs.

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