Banks have been driving up penalty fees since a successful High Court appeal in 2016. (ABC News: Michael Barnett)
The big banks’ most vulnerable customers, who are also among their most profitable customers, should be the focus of the financial services royal commission according a leading consumer finance advocacy group.
- Royal Commission needs to focus on debt traps and dubious marketing ploys ensnaring low income customers
- Late-paying and overdrawn customers are among the most profitable for banks
- Bank penalty fees are rising sharply after being given the greenlight by the High Court in 2016
In one of the first public submissions to the Royal Commission into Misconduct in the Banking, Superannuation and Finance Sector, the Consumer Action Law Centre (CALC) highlighted the design of credit card products, the marketing of credit and excessive bank fees as key areas of exploitation.
CALC chief executive Gerard Brody said, while financial services misconduct affects all consumers, it has a disproportionate impact on the lives of low-income, vulnerable and disadvantaged people.
“This inquiry should hopefully look at the issue that is front of our face,” Mr Brody said.
“Bad financial advice and business banking have received a lot of consideration at various inquiries already, this inquiry needs to focus more on impact of misconduct has on the most vulnerable people.”
Poor pay for the wealthy’s credit card rewards
The centre targeted the practice of “teaser” offers, which are used to entice new credit card customers but hide the true cost of the product.
“Credit card lenders ‘bundle’ these complex pricing structures in their marketing and product information, which makes the overall costs difficult for the average consumer to understand,” the CALC submission observed.
CALC argued lenders eventually offset the costs of these teaser offers by charging high standard interest rates on outstanding balances and new purchases.
“People who are unable to make repayments on time, or overdraw their accounts, pay more fees and interest,” it explained.
“This makes them arguably the most profitable customers for the banks, and means they are ultimately paying for the reward points and interest-free periods the wealthier enjoy.”
The centre also took aim at what it called “irresponsible credit marketing” via unsolicited offers designed to encourage consumers take up more debt.
The practice tends to involve banks sending the borrower a pre-approved credit limit increase, presenting the offers as the status quo.
“The net result is that consumers take on additional credit against their better interests,” the centre argued.
While there have been some regulatory efforts to rein-in unsolicited credit marketing, these are often circumvented by lenders using the consent loophole.
“Typically these offers are not clear and are made through means such as by phone, via online banking portals, in the contract fine print or through text message prompts.”
Penalty fees rising again
The centre also noted the most financially vulnerable customers were being swamped by a rapidly rising tide of penalty fees.
Having wound back fees in the early part of the decade to deal with rising consumer anger and a number of class actions, banks have again been raising fees after a successful High Court appeal in 2016.
The decision in favour of ANZ upheld the lawfulness of a $35 late payment penalty, even though it did not represent anything like the costs incurred by the bank.
The CALC submission said unit penalty costs from various banks have risen since the decision and cites an increased credit card late payment fee charged by NAB jumping from $5 to $15 — an increase of 200 per cent.
On Australian Banking Association figures, penalty fees paid by households and businesses topped $700 million in 2016, a $70 million increase on 2012 levels.
CALC noted bank fees tend to have a harsh and disproportionate impact on lower income Australians.
“For people who are already struggling with debt, late fees only make the task of repayment more difficult,” it observed.
“A $40 penalty fee for a person earning a basic Newstart income of $13,993 [per annum] equates to almost 15 per cent of their weekly income.
“For families budgeting week to week, an errant penalty fee can risk payment for essential services like housing or energy.”