Banks cannot charge overdraft or late payment fees, rules Supreme Court

Kutxabank, formerly known as the BBK and which operates all over Spain, has been rapped over the knuckles by the highest contentious court in the country for charging €30 each time a customer goes into unauthorised overdraft or his or her monthly mortgage repayment is more than a week late.

The verdict refers to a case in the European Court of Justice (ECJ) of October 3 this year – the 'Gyula Kiss' case – which states that the consumer must be able to check there is no overlap between fees charged and services provided.

Another ECJ hearing of February 26, 2015 – the 'Matei case' – found a clause involving a charge for late payment of a loan or mortgage to be 'abusive', since it constitutes a 'sanction' for the 'simple risk banks run in providing credit', despite 'sanctions' already being provided for in terms of 'legal and contractual consequences'.

In other words, defaulting on a loan or mortgage eventually allows a lender to take legal action to reclaim the debt, such as seizing secured assets, after a set period of time or percentage of the credit unpaid – in the case of mortgages, no action can be taken until either the unpaid monthly instalments total at least 20% of the overall debt, or a full year's worth of quotas have been missed, whichever comes first, according to an EU directive which Spain has recently incorporated into national law.

And the risk the bank takes in lending money to consumers is one that the entity itself is required to bear, protected by these legal measures, but by charging a penalty fee for late payment in addition means removing some or all of this risk, going against the fundamental nature of this business venture.

Also, interest at current rates is automatically charged for an unauthorised overdraft after a set period of days, or for late payment of a loan or mortgage instalment, as standard practice, and the Supreme Court considers that a penalty fee on top is a 'double punishment'.

The Court says the €30 penalty also flouts the law that a bank cannot charge for services it does not provide.

According to the Association of Financial Services Consumers, ASUFIN, any fee charged by a bank is automatically considered a 'commission', and as no expense is incurred by the entity nor is any work carried out which would justify a commission being charged, there are, by default, no grounds for levying any type of penalty on a customer for non-payment.

ASUFIN points out that customers have a choice as to which banks to use and are 'doing them a favour' by trusting them with their business, and it is not up to the recipient of this 'favour' to 'punish' the 'favour provider'.

The Association has expressed its satisfaction with the Supreme Court verdict, saying it 'supposes another step forward' towards achieving a 'fairer and more transparent banking and financial sector'.

“Banks and financial service providers need to behave responsibly, ditch this abusive practice and not force their valuable customers to have to go through the courts to reclaim a commission that they should not be charging in the first place,” says ASUFIN chairwoman Patricia Suárez.

The Supreme Court has ruled that a charge for being overdrawn or for missing a monthly mortgage payment 'does not comply with the Bank of Spain's requirements', which is that other than interest for the delay, no other fee can be charged unless a specific service is provided to justify it.

As yet, it is not clear whether the Supreme Court verdict applies retroactively and for how long this would affect past payments, but it appears likely it will only be effective from the date of the judges' collective decision.