the mozo blog

A slew of Australia’s banks, including the Big 4, are facing, what is being labeled as the largest class action case in corporate history. Litigation funder IMF Australia is funding several class action suits against the banks, seeking at least $400 million of the $5 billion charged in ‘exception fees’ by the banks.

Exception fees are fees charged by banks for ‘exceptional’ circumstances. These circumstances include late payment fees on both credit cards and loans, over-limit fees on credit cards, honour fees when overdrawing a bank account, and dishonour fees charged for cheques that bounce. Reserve Bank data shows that banks charged consumers $961 million in exception fees in 2008.

The impact of these fees on your credit card cost can be significant. Say you’re on a ‘low rate’ credit card with an interest rate of 11.99% and running a $3000 balance. A $30 charge for being a couple of days late on a payment effectively makes your interest rate 12.99% in terms of your cost. If you’re late or overdraw a few more times over the course of the year, the additional costs effectively transforms your low rate card into a middle of the range card without any of the perks.

The principal legal argument for the class action is that when a customer breaks a contract with a bank (by making a late payment for example), the bank may only be able to recover a reasonable estimate of the cost. IMF Australia’s contention is that the banks charge fees much higher than what can be termed a ‘reasonable estimation’, given that it actually costs banks “only a few dollars at most” when you make a late payment or overdraw on your account.

There is a foreign precedent, with close to a million Britons unsuccessfully seeking compensation for overdraft charges in 2009, though a new case set to be heard in Glasgow in June could lead to more litigation. The issue also reared its head in America, with the US Federal Reserve recently ruling that creditors must obtain a consumer’s consent before charging fees for transactions that exceed the credit limit.

Here in Australia, the worst offenders for credit card over limit and late payment fees are Citibank and Suncorp, both charging a whopping $40 for each occurrence. Even NAB, who made a great deal of noise when slashing bank account fees this year, still charge $25 for going over your card limit and $30 for a late payment. Westpac and St. George lead the way, charging only $9. However, the case goes back six years, which could still spell trouble for those who have only recently cut fees.

Even though there will most likely not be a resolution for years, if ever, it will be intriguing to see how the banks behave in the light of all this publicity, particularly in a time of record profits. Even if this case is successful, it almost goes without saying that the banks will find other means to maintain their margins, whether through higher regular account fees or interest rates. As a consumer, the best way to deal with this is to shop around. Only when customers start voting with their feet (and their wallets) will banks really address these issues.

Banking comparsions at mozo.com.au

The words ‘tax’ and ‘exciting’ make strange bedfellows at the best of times, but it really can be described as a potentially exciting time for Australians on the tax front. Consumers look set for a double boost this Sunday, when the Federal Government finally releases its findings and decisions derived from the ‘Henry review’ of the tax system. Chaired by the head of the Federal Treasury, Ken Henry, the review has been labeled as a “root-and-branch” review of Australia’s tax system, and by all reports consumers could see gains with regards to both their savings and their mortgages as a result of some of the potentially adopted findings. Dr Henry handed over the report to Treasurer Wayne Swan in December 2009 and since then, Treasury officials have been working on the government’s response to the review.

In terms of Australia’s banking climate, the review looks set to cause a possibly portentous shake-up of the savings account market. Australia is one of the few countries in the developed world to currently tax bank savings at the full rate, a tag which by all reports will be shed soon, with the government preparing to offer significant tax breaks on savings. Whilst the extent of these breaks are as yet unknown, they are unlikely to match the UK model of which where individuals can deposit close to $17,000 (£10,200) tax-free. Dr. Henry is a known admirer of the UK system, yet many in the media are purporting rumours that something similar to the concessions currently in place for superannuation accounts will be announced instead. However, considering the range of options available in terms of size, scope and delivery, there’s no way to be sure till we hear what Wayne Swan has to say himself.

The tax break would also be a huge boost for Australia’s banks as it could generate billions in additional deposits, potentially lowering their funding costs through reducing the reliance on overseas finance. As a result of this, consumers could potentially receive a boost with regards to home loans payments. The banks have been very quick to use high funding costs to justify mortgage rate rises above that of the Reserve Bank‘s cash rate increases. With funding cost pressures alleviated to a significant degree, the government may well turn around and use this savings deposit boost as political leverage aimed at forcing banks to keep mortgage rates down and in turn, voters happy.

Either way, as far as the banking industry is concerned, consumers look to finally be on the receiving end of some good news. Mozo’s Rate Chasers will have a full wrap-up of all the implications for both deposit and lending accounts here on Monday, so be sure to check back to see what all the new changes mean for you.

Compare savings accounts at mozo.com.au

As GFC mud was slung in the States, Congress ducked for cover behind its credit card reforms — which were passed in May last year and have just come into effect. Whether similar changes should be expected in Australia remains uncertain, and will be some time off if they do eventuate. As far as the US reforms go, there’s both good and bad news for consumers.

On the upside, random interest rate changes have been abolished, as the centrepiece of the reform. How and when banks can raise interest rates is now tightly regulated, and they must give at least 45 days’ notice before increasing their interest rates. Furthermore, a review of penalty rates and fees is scheduled for later this year.

The major lenders have responded, however, by hiking up fees, and inventing new ones. So your balance transfer with JPMorgan Chase will now attract a 5% fee. Let’s hope that one doesn’t emigrate down under.

And credit card rewards have also been hit with various creative penalties, such as no points accrued on purchases if the customer is late with a payment (courtesy of American Express co-branded cards).

One of the big wins (for consumers) is restrictions on credit limits, and more stringent credit cards application processes, with lenders tightening up access to credit. Which may seem rough to those struggling to find a provider, but will hopefully lead to fewer borrowing more than they can afford.

Australia is usually a couple of years behind American credit card trends (for example, the 0% balance transfer), so it’ll be interesting to see which, if any, changes trickle through to the domestic market.

compare credit cards at mozo.com.au

Late last year, consumer group Choice won a significant victory in the conservative (ie stubborn) field of bank fees. NAB declared it would drop dishonour fees on overdrawn savings and transaction accounts following a backlash against the unpopular charges. And now businesses will reap the rewards, too.

The bank was pressured both by ongoing complaints and the Reserve Bank’s disclosure that the industry raised almost $1 billion in dishonour and exception fees. While the cause was taken up in defence of underprivileged account holders, small business will also enjoy the fruits of fee free accounts, which come into place this week.

At this stage, none of the other big banks have followed NAB’s move, but it’ll be interesting to see whether more consumer agitation drives changes that also benefit small business. We’ll keep you posted.

Compare banks accounts at mozo.com.au

In the US, a lot!! Because for reasons I will not even try to understand, the US Senate has just passed a bill that cracks down on credit card fees , with an attached measure that would allow guns in national parks. What the…..?

Like me you likely have at least one eyebrow raised right now.

Though at least the attempt to attach an immigration provision to the same bill, that would have banned credit cards from going to anyone who isn’t an American citizen, failed. Phew, at least some dose of reality.

So apart from the sheer absurdity of connecting guns in national parks to credit cards, this is a very significant change which will have a major impact on the US credit card industry. And of course what happens in the US often trickles down under eventually, so let’s take a closer look.

Essentially the changes, headed to Obama’s desk for signing today, will:

• ban interest rate hikes on existing balances
• dictate that 45 days notice must be given for significant interest rate, fee and finance change increases
• enforce the ‘good’ type of payment allocation (thereby stopping one of the banks’ sneakiest practices of all, where they apply money paid back to the lowest rate first, such as a balance transfer rate, and leave the high interest rate purchases or cash advances accruing)
• cease the practice of automatically taking a card over the credit limit and then applying a fee without warning.
• limit the number of cards and the amount of credit limits for people under 21

What an incredible victory for the consumer!!

Of course the US banks have tried every argument they can think of to stop this going ahead, and are essentially now threatening that interest rates and fees will have to go up for everyone. But those who respond by doing that will see consumers vote with their feet.

Happy days for US consumers.

I wonder if Canberra is watching?