New Zealand’s High Court has found TSB Bank guilty of unlawfully and “unreasonably” overcharging its customers more than $3.6 million in credit and default fees.

New Zealand’s competition and markets regulator, the Commerce Commission, which pursued the civil action, accepted an admission by the Kiwi-owned challenger bank of “system failures which saw customers charged more than they should have been across 12 credit and default fees”.

The offences, which affected customers with TSB loan and credit card accounts, occurred between June 2015 to November 2021.

The bank ceased charging the fees in late November 2021, and self-reported the breach to the Commerce Commission early in the following year after an internal review.

In response to the Court’s findings, the Commission wrote : “These failures breached the CCCFA’s [Credit Contracts and Consumer Finance Act’s] credit and default fees provisions.

“In two cases TSB charged fees that it did not have a contractual right to charge, and in doing so it fell short of the care, diligence, and skill required of a responsible lender.”

The Court issued TSB with a $2.47 million fine for the historic CCCF Act breaches.

Justice Jagose, who presided over the case, characterised the bank’s contraventions as “reckless”, accepting the bank’s admission that it “set the amounts of its credit and default fees … without due regard to what was needed to comply” with the Act (specifically citing s41 of the Act: ‘A consumer credit contract must not provide for a credit fee or a default fee that is unreasonable’).

TSB, after self-reporting the issues, made remediation payments of around $6 million to 48,000 affected borrowers.

The Commission confirmed that the bank fully co-operated with its investigation into the alleged breach, and made “a constructive response to its contraventions”.

Commerce Commission Deputy Chair, Anne Callinan said that, in the Commission’s view, TSB’s breaches were serious given the large number of customers affected, the level of harm from overpaid fees, and the extensive duration of the breaches.

“The rules around credit and default fees are well established and we expect lenders like TSB to have proper processes in place to make sure they’re following their obligations under the CCCFA.”

Complex and opaque fee arrangements

Among the 12 separate fee categories implicated in the CCCFA breach included fees for monthly revolving credit on loan accounts (which took in more than $980,000), cash advance on credit card accounts (which took in over $157,000), and late payment defaults (which took in nearly $580,000).

The court found the bank had an opaque, complex and insufficiently disclosed fee arrangement for each of the 12 categories.

“The fees were set without reference to s 41, with reference instead to other commercial considerations (including comparator fees charged by other financial institutions, and the amounts of those fees; customer satisfaction and the value customers placed on fees; whether fees carried a direct cost or involved staff or were automated; the bank’s proposition as a low to no fee bank; and the bank’s ability to generate income, and potentially profit, from those fees),” the Justice Jagose noted.

These fees were ultimately found to have exceeded the amount necessary to redeem “the costs incurred by the creditor in relation to the steps to which the fee relates (or the losses relating to a default)”.

A subsequent review by the bank found only 14 of its 35 fees were non-compliant with the Act.

Justice Jagose noted that bank’s long-term charging of unreasonable credit and default fees to be of “high gravity”, with TSB’s breaches “[striking] directly at the Act’s objective of establishing efficient, fair and transparent credit and default fees under consumer credit contracts between creditors and responsible lenders.”

He added: “None of the bank’s 35 such fees was established by reference to reasonable compensation to the bank for the costs (including losses) incurred by it in provision of the service for which the fee relates, according to reasonable standards of commercial practice.”

Callinan concluded: “These restrictions on fees are in place to protect borrowers and make sure Kiwi customers can easily compare loan offers – lenders need to regularly review their fees to ensure they are reasonable and not just set and forget them.”