An amazing little aside in the news this week: John Tiner, head of the Financial Services Authority (FSA), doesn’t understand contract law. That’s the only conclusion I can draw from this extract from Guardian Unlimited Business | | Lunchbreak sessions to tackle financial skills:

The City watchdog boss even laid bare the difficulties his own 19-year-old daughter has suffered grappling with her first financial products as she began university. “She rang me after getting a £25 penalty charge which was added on to her credit card. It turned out she hadn’t understood that you had to pay at least the minimum amount off each month.”

No, Mr Tiner, you’re wrong. You don’t have to pay anything off, and you certainly don’t have to pay any penalty charge. As I pointed out back in September 2004 at “If your credit card imposes a penalty payment, don’t pay it: it’s not legally enforceable“, penalty charges like those are disproportionate. The credit card provider hasn’t incurred £25 worth of trouble; it won’t have gone to £25 worth of trouble (such as printing a separate letter or looking up your credit record or anything like that). Therefore that charge cannot be enforced. It’s referenced in that blog entry. Yes, you do eventually have to pay them back that money you’ve borrowed, at the interest rate they specify. But not the penalty charges (or, if you’re being strict, the interest on them).

GMTV has been running a campaign along exactly these lines, over bank overdraft charges: see this story about how a man challenged it, and won his case. The bank didn’t turn up at the County Court. Hey, legally does that count as a precedent? You’d think if it was so open-and-shut they could afford to send one brief for a day, even to establish the precedent, hmm?

And does it work – refusing to pay penalty charges? Yes, it does. I’ve done it before. I did it the other day. I called to check why my outstanding amount wasn’t what I thought it should be (nothing untoward, just an uncleared transaction). And thought I’d pay on the phone. But first, asked if there was a “penalty charge” in there, since I was fairly sure I’d missed the payment date. Why yes, said the cheery person. I’m sorry, I’m not paying it, I explained. Contract law, unenforceable, and so on.

“Well,” he said, “as this is the first time this year that you’ve asked for this to be removed…” I still paid the outstanding amount. But not the penalty. Hey, it’s £20 – or £25 now. Whatever. I don’t pay it. And neither would your daughter, Mr Tiner, if you’d pay a bit more attention.