Banks in the fee casino
The class action that 12 banks in Australia are facing is an awkward one. If they lose, another group will take a massive fee - the lawyers and litigation funders.
Running any kind of financial services business is often like running a casino – sometimes you win, sometimes you lose, but hopefully you set your book so that you win more than you lose. This applies to credit spreads, and – believe it or not – 'penalty' charges. At least this is the argument the banks will have to run to go up against the posse drawn from society's lightest touches – the legal fraternity – now pursuing a class action against them.
Twelve banks in Australia are facing this class action, and it is bound to be an awkward one. My bank charges me something in the vicinity of $30 if I become overdrawn. Is this fee obscene when I only become overdrawn because I have a credit balance of $3 the day my monthly account keeping fee of $6 is charged to my account, sending me into the red by $3 ($33 in the red post-fee)?
The argument against penalties is that there is no legal basis for a bank, or anybody else, to claim 'penalties' over and above the value of 'liquidated damages' – the damages incurred by the bank as a result of my default.
In my case, there is simply no way that the bank can say it has incurred anything like the $30 it is charging me in expenses to recover the $3 I initially went into the red for. For the banks to try and justify 'damages' purely on the basis of cost is surely going to be a stretch.
Perhaps the banks might try to argue that it is the potential loss, both in terms of operational expenses and capital, that they are providing for – back to the casino analogy. The wins pay for the losses – sort of.
In my case, it could not have cost them more than about 3 cents to recover the $3 I was overdrawn, making the bank a profit of $29.97 on the fee charged. However, should my recalcitrance have persisted, their operational expenses would have escalated – say for example if someone should have to review my file and make a telephone call urging me to bring the account back in to line. And who knows, in the end, they might have even had to write off some capital – again, in my case $3 – assuming they had not accrued the penalties. But in many cases, there is much more than this amount.
But ironically, the firm running the class action stands to keep 25 per cent of the loot in the event the banks lose. So, if the courts award damages in the order of $400 million (the figure reported yesterday, but speculation over 'billions' of dollars is not without foundation), then the litigation fund keeps $100 million, less costs – thereby appropriating some of the bank's presumably ill-gotten gains for themselves.
The litigation fund's defence for its slice of the cake, of course, is that it will be risking the capital of its investors in meeting the costs of running that action. But don't the banks put the capital of their investors at risk as well? There is a modicum of hypocrisy in this at least, surely?
The fact that banks have started dropping exception fees of their own volition this year is proof in itself that you can't defend the indefensible, and I am certainly not defending the banks.
In the words of Johnny Rotten, "no one's innocent”. Why is it that on one phone plan my phone bill this month could be $1,500, but on another it is $120 (capped) for identical usage? How do they justify that on a 'cost' basis? They can't, except by using the casino analogy.
If this one gets up, I dare say Financial Redress and its funder, IMF, will find proved and probable opportunities worthy of drilling well beyond the boundaries of financial services.
In this particular case however, Australian society might ask itself this question: if the banks are guilty of being exception fee brigands, is justice and the process of compensation best executed by the state (say via the ombudsman some other regulatory authority), or as a community, are we better served by leaving justice in these matters to bounty hunters?
Nick Samios is the managing director of commercial non-bank financiers Hermes Capital Partners, and a casual academic at the Graduate School of Business – UTS.
Twelve banks in Australia are facing this class action, and it is bound to be an awkward one. My bank charges me something in the vicinity of $30 if I become overdrawn. Is this fee obscene when I only become overdrawn because I have a credit balance of $3 the day my monthly account keeping fee of $6 is charged to my account, sending me into the red by $3 ($33 in the red post-fee)?
The argument against penalties is that there is no legal basis for a bank, or anybody else, to claim 'penalties' over and above the value of 'liquidated damages' – the damages incurred by the bank as a result of my default.
In my case, there is simply no way that the bank can say it has incurred anything like the $30 it is charging me in expenses to recover the $3 I initially went into the red for. For the banks to try and justify 'damages' purely on the basis of cost is surely going to be a stretch.
Perhaps the banks might try to argue that it is the potential loss, both in terms of operational expenses and capital, that they are providing for – back to the casino analogy. The wins pay for the losses – sort of.
In my case, it could not have cost them more than about 3 cents to recover the $3 I was overdrawn, making the bank a profit of $29.97 on the fee charged. However, should my recalcitrance have persisted, their operational expenses would have escalated – say for example if someone should have to review my file and make a telephone call urging me to bring the account back in to line. And who knows, in the end, they might have even had to write off some capital – again, in my case $3 – assuming they had not accrued the penalties. But in many cases, there is much more than this amount.
But ironically, the firm running the class action stands to keep 25 per cent of the loot in the event the banks lose. So, if the courts award damages in the order of $400 million (the figure reported yesterday, but speculation over 'billions' of dollars is not without foundation), then the litigation fund keeps $100 million, less costs – thereby appropriating some of the bank's presumably ill-gotten gains for themselves.
The litigation fund's defence for its slice of the cake, of course, is that it will be risking the capital of its investors in meeting the costs of running that action. But don't the banks put the capital of their investors at risk as well? There is a modicum of hypocrisy in this at least, surely?
The fact that banks have started dropping exception fees of their own volition this year is proof in itself that you can't defend the indefensible, and I am certainly not defending the banks.
In the words of Johnny Rotten, "no one's innocent”. Why is it that on one phone plan my phone bill this month could be $1,500, but on another it is $120 (capped) for identical usage? How do they justify that on a 'cost' basis? They can't, except by using the casino analogy.
If this one gets up, I dare say Financial Redress and its funder, IMF, will find proved and probable opportunities worthy of drilling well beyond the boundaries of financial services.
In this particular case however, Australian society might ask itself this question: if the banks are guilty of being exception fee brigands, is justice and the process of compensation best executed by the state (say via the ombudsman some other regulatory authority), or as a community, are we better served by leaving justice in these matters to bounty hunters?
Nick Samios is the managing director of commercial non-bank financiers Hermes Capital Partners, and a casual academic at the Graduate School of Business – UTS.
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