The Financial Markets Authority has filed legal action against Kiwibank alleging the bank made false or misleading representations over fee waivers to its home loan customers.
The bank's terms and conditions stated customers would not pay transactions fees on their accounts if those customers had a mortgage with the bank.
But between September 1, 2005 and March 31 2020 around 35,000 Kiwibank home loan customers did not have the fee waiver applied, resulting in them being overcharged by $1.17 million.
The charges are being brought under the fair dealing provisions of the Financial Markets Conduct Act but because this act only came into force from April 1, 2014 the proceedings can only cover conduct from that date.
That means the legal case will only involve 19,000 of the affected customers who were overcharged $576,809.
Kiwibank first identified the issue around August 2019 after the FMA and the Reserve Bank carried out a joint review on the conduct and culture of the banking sector.
As part of that the banks were asked to provide details of any remediation work under way where bank conduct had resulted in detrimental outcomes for customers.
The bank reported the issue to its board in October 2019 and then advised the regulator.
In its statement the FMA said the steps taken by Kiwibank after it discovered the problem 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 bank began remediating affected customers in May 2021 for the amounts overcharged plus use of money interest.
"The FMA has been advised that remediating customers is almost complete and will continue to request progress reports from Kiwibank.
"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."
A spokesman for Kiwibank said it has and continues to take any issue impacting its customers seriously.
"This includes proactively seeking out and investigating issues where, like in this case, manual processes have led to errors. We are sorry for the impact this issue has had on our customers. We remain committed to finding any such issues and making them right."
The spokesman said the bank incorrectly charged transaction fees to some customers when it shouldn't have.
"Kiwibank discovered the issue in August 2019 and 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.
"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."