The Financial Markets Authority (FMA) has filed legal action against Kiwibank, saying 35,000 customers were overcharged by $1.17 million.
It alleges that the bank made false and misleading representations to home loan customers that transaction fees would be waived.
In a statement released on Thursday, FMA said Kiwibank terms and conditions stated that customers wouldn't pay transaction fees on their accounts if those customers had a home loan with the bank.
But between September 1, 2005 and March 31 2020, around 35,000 Kiwibank home loan customers didn't have the fee waiver applied to their accounts, the FMA said. This resulted in these customers being overcharged by $1.17 million.
The charges are being brought under the fair dealing provisions of the Financial Markets Conduct Act. But because the Act only came into force from April 1, 2014, legal proceedings can only cover conduct from that date.
Legal action will therefore involve 19,000 of the affected customers who were overcharged by $576,809.
Kiwibank began the remediation process to affected customers in May 2021, which is understood to be almost complete.
This included compensation for the amounts overcharged, plus "use-of-money interest", the FMA said.
Kiwibank first identified affected customers in or around August 2019. The bank reported the issue to the board in October 2019, then to the FMA shortly after.
This followed a conduct and culture review of NZ registered banks, undertaken jointly by the FMA and the Reserve Bank in June 2018. Under the review, banks were asked to provide details of any remediation work underway, where bank conduct resulted in detrimental outcomes for customers.
The steps taken by Kiwibank after it discovered the issue were relevant to its enforcement response.
"However, the nature of the underlying conduct will always be the driving factor in assessing the appropriate response, and the FMA considered the alleged conduct in this case warranted civil proceedings," the FMA statement said.
"The FMA is seeking a declaration that Kiwibank contravened a fair dealing provision of the FMC Act and an order that Kiwibank pay a pecuniary penalty to the Crown and costs."
Progress reports would continue to be requested from Kiwibank until the customer remediation process is complete.
A Kiwibank spokesperson confirmed in a statement the case relates to customers who were eligible to have transaction fees waived for their personal banking accounts.
"However, we incorrectly charged these transaction fees to some customers when we shouldn’t have," the spokesperson said.
Having discovered the issue in August 2019, the bank "quickly fixed the problem".
"We’ve apologised to our customers for the error and fully refunded those fees and any interest they would have earned on that money."
The bank said it will proactively seek out and investigate issues where, as in this case, manual processes have led to errors. It apologises for the impact this issue has had on customers.
"Kiwibank has acted proactively, openly, and transparently with the FMA on this matter. We are unable to comment any further now that it is before the courts," the spokesperson added.
If customers have any questions about the issue, they can find more information on the bank's website.