‘Systems error’ sees CBA liable for overcharging business customers $2.2m

ASIC is seeking sanctions and penalties against the Commonwealth Bank of Australia (CBA) after a Federal Court ruling found the lender had severely overcharged business clients for overdrafts.

The court found the unsanctioned charges were largely the result of “inadequate systems and processes”.

Justice Lee in a court order said CBA accepted ASIC’s allegations that it overcharged customers on more than 12,000 occasions between 2014 and 2018, while also sending customers periodic account statements referencing rates which failed to reflect the actual amount charged.

The overcharging issue was first raised during the 2018 Hayne Royal Commission. However, ASIC only took CBA to court over the issue last November.

In its case, ASIC held that, since 2014, the bank had charged more than 1,510 business customers upwards of $2.2 million in excess interest at a rate of nearly 34 per cent per annum – well above the 16 per cent stipulated in CBA’s terms and conditions for overdraft accounts.

Prior to this, Commissioner Hayne noted in his Interim Report that CBA had only notified ASIC of the overcharging issue in 2018, despite having discovered it in 2013 following a customer complaint.

Further investigation revealed the practice actually started in 2011, the report revealed.

“CBA did not detect what turned out to be an issue affecting nearly 3,000 customers until well after the event. When it did detect the problem, it took some time to remedy the consequences,” the report stated.

According to Hayne, manual corrections were introduced by CBA until a “system-based fix” was implemented in May 2015. This, however, failed to rectify the problem and the issue persisted well into 2018.

In a statement, ASIC Commissioner Sean Hughes traced the root cause of CBA’s overcharging woes to the lender’s failure to rectify its “systems error”.

“Financial services institutions need to have appropriate systems, governance and controls in place to ensure they deliver on promises made to their customers,” Commissioner Hughes said.

“Investment in good systems needs to be prioritised by all financial services institutions to ensure trust in our financial system is re-built and to avoid a repeat of these failures in the future,” he added.

Justice Lee, in his court order, found CBA guilty of making “false or misleading representations” on interest rates while engaging in “misleading and deceptive conduct” by overcharging customers.

The bank was also found to have breached s12DA(1) and s12DB(a) of the ASIC Act 2001, as well as its general obligation as a financial services licensee to comply with financial services laws, contravening s912A(1)(c) of the Corporations Act.

CBA has since established a remediation program that has so far compensated $3.74 million to customers.

Notably, this is not the first time CBA has been caught on the wrong side of a Federal Court ruling for the unsanctioned charging of excess interest. Last June, the bank was handed a $5 million fine for overcharging interest on their now-defunct AgriAdvantage Plus Package (sold for around a decade until December 2015), which entitled customers, mostly farmers, to benefits including fee waivers, interest rate discounts, and bonus interest on savings.

CBA was deemed to have failed to “establish and maintain systems and processes”, with the overwhelmingly manual processes at the time lacking sufficient checks to ensure benefits were being consistently delivered.

Despite these headline-making missteps, Australia’s biggest bank last month clinched top spot on Brand Finance Australia’s annual analysis on brand strength, with CBA hailed for its “strong reputation for [its] product range, website, apps and services”.

The bank last week also released reports on its Remedial Action Plan (RAP), indicating significant progress being made in operational risk management and a clear focus on “ensuring good customer outcomes”.

A hearing to finalise penalties for the lender is scheduled for 6 April.