The Federal Court of Australia has ordered the Commonwealth Bank of Australia (CBA) to pay a $7-million penalty after the court had previously declared that the lender made false or misleading representations and engaged in misleading and deceptive conduct.
According to the Australian Securities & Investments Commission (ASIC), these declarations related to 12,119 occasions when CBA charged a rate of interest on business overdraft accounts “substantially” higher than what its customers had been advised.
The penalty order has followed civil penalty proceedings which were brought against the major bank by ASIC in the Federal Court in December last year for overcharging customers.
The proceedings related to CBA’s conduct in relation to an overcharging error with two products, including the Simple Business Overdrafts and Business Overdrafts between December 2011 and March 2018.
The rate, which customers were advised would be 16 per cent per annum in most cases, increased to around 34 per cent per annum, with the total overcharged interest exceeding $2.9 million.
According to ASIC, CBA’s conduct in the matter resulted from inadequate systems and processes.
ASIC alleged, and CBA admitted, that from 1 December 2014 to 31 March 2018, CBA:
- Provided customers with terms and conditions for certain credit facilities that stated an interest rate to be charged or that had been charged (in most cases, 16 per cent per annum);
- Sent periodic account statements to customers referencing the rate at which interest rate was being charged (in most cases, 16 per cent per annum); and
- Due to a systems error, charged more than 1,510 customers a different, higher interest rate on overdraft accounts (in most cases, approximately 34 per cent per annum).
In February 2021, the Federal Court declared that the major bank engaged in misleading and deceptive conduct on 12,119 occasions when charging interest on business overdrafts.
As such, the court declared that on each of the 12,119 occasions that CBA breached the ASIC Act, it also breached its general obligations as a financial service licensee to comply with financial services laws, in contravention of the Corporations Act.
ASIC said that in reaching the penalty decision, Justice Lee took into account comprehensive written penalty submissions in addition to oral submissions made by ASIC and CBA.
While CBA submitted that an appropriate penalty was $4 million to $5 million, ASIC submitted that a $7-million penalty would be appropriate.
Justice Lee found that CBA’s conduct was serious, the number of false and misleading representations were significant, and that conduct of this type and nature must be prevented, according to ASIC.
His Honour rejected the submission that CBA had acted “expeditiously” to rectify the error and found that CBA’s delay was particularly “troubling”, given the relationship between a bank and its customers, the corporate regulator added.
The matter will return to court on 30 April 2021 to determine the form and content of the publication order and an order regarding ASIC’s costs.
The major bank’s conduct was subject of a case study by the banking royal commission, which was explored in the interim report.
Commenting on the case, ASIC commissioner Sean Hughes said: “Financial services institutions need to have appropriate systems, governance and controls in place to ensure they deliver on promises made to their customers. When CBA failed to resolve this error after it was identified, customers were overcharged more than $2 million in interest.
“CBA’s delay in remediating customers following this error was an aggravating factor in the court’s determination of the penalty. When financial institutions discover overcharging, they must take immediate action to remediate impacted consumers.
“As recognised by Justice Lee, CBA made important admissions as to its many contraventions of the law. CBA is now making investments in its systems as a matter of priority. All financial services institutions should make similar commitments to rebuild trust in our financial system and to avoid further failures.”
CBA responds to the court-ordered penalty
CBA has responded to the penalty order, with a spokesperson telling Mortgage Business that the major bank cooperated “fully” with ASIC’s investigation and did not defend the proceedings.
Furthermore, the spokesperson said the problems caused by the error have been addressed, with 2,269 customers sent refunds totalling $3.74 million, while the remediation program has now concluded.
Commenting further, the spokesperson said: “Failures of this sort are unacceptable, and we apologise to those customers who at the time were overcharged fees.
“If business customers have any concerns or questions about this matter, we encourage them to contact their relationship manager or the CBA Business Bank Service Centre.”
CBA was previously ordered to pay $5 million in an unrelated matter in June 2020, after the Federal Court ruled that it had breached its obligations under the ASIC Act and Corporations Act for failures in its administration of its AgriAdvantage Plus Package (AA+ Package) between May 2005 and December 2015.
Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.
Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.