Andrew Barnes: 14 years after the GFC, have we learned anything?
In The Big Short, Christian Bale portrayed investor and doctor Michael Burry, one of the first to discover the US housing market bubble. Paramount Photo/Pictures
One of my favorite films is The Big Short, which chronicles the events leading up to the global financial crisis of 2008.
The film shows how the big financial institutions played with the system and took
at substantial risk and then bailed out by governments because they were “too big to fail”.
In contrast, ordinary people, especially the less well off, lost their jobs and their homes. At the end of the film, there is a summary which demonstrates that most of the responsible bankers did indeed come out unscathed.
What’s clear both in the movie and in real life is that the whole process could have been avoided if regulators, central banks and rating agencies hadn’t all fallen asleep at the wheel.
In some ways, we live in a time that replays the events that preceded the GFC. Not only have we seen significant increases in household debt caused primarily by historically low interest rates, but we have also experienced a period where organizations, often ostensibly tech companies, have exploited the naivety of regulators and politicians to create vehicles capable of causing significant damage to our social fabric.
It is somewhat ironic that recent consumer credit legislation has made it increasingly difficult for Kiwis to buy their own homes. Arguably, the legislation was introduced for the right reasons – to ensure home loans were affordable for applicants. However, it is strange that a number of elements that could prevent the success of a credit application are not subject to the same level of regulation and control.
One of the best known programs is buy now, pay later. These facilities are unregulated, primarily because the Autorité des Marchés Financiers has determined that without interest charges, they are not credit. This subscribes to the illusion that the costs of installation, borne by higher store prices or default charges, do not replace an interest charge.
Somewhat confusingly, the Department for Business, Innovation and Jobs recently described buy it now and pay later (on which the Kiwis spent $1.7 billion last year) as being rapidly becoming “an established form of credit in New Zealand”.
I have argued before that buying now and paying later is credit. In my opinion, if it looks like a duck and quacks like a duck, it’s a duck.
Australia’s Deputy Treasurer Stephen Jones explicitly agrees, referencing the duck maxim and telling a senior lending and borrowing official that to ask whether buy now, pay later is credit is silly – that he will treated as a credit and that shouldn’t be controversial.
Based on a four to six percent merchant fee plus default charges, this is by no means cheap credit. Merchant commission annualization essentially demonstrates that these interest rates are equivalent to 30-45% (before default charges).
Regulation is clearly needed in New Zealand, but the FMA clings to its naïve approach.
Capital allocations applied to large banks to ensure they have sufficient capital to meet their obligations consider consumer lending to be high risk. Yet lending hundreds of millions to an institution that buys now and pays later is considered business and therefore lower risk, despite having exactly the same risk profile.
Indeed, it can be argued that the mortgage-backed securities that caused the financial market crash in 2008 are very little different from the financing mechanisms of the buy-now-pay-later explosion. At the time of the GFC, banks argued that having multiple home loans behind mortgage-backed securities also made them less risky.
Similarly, payday loan companies have been hailed as some of the fastest growing fintechs, but the government has been slow to regulate the industry and even then has not effectively eliminated a described process. by the minister responsible in 2020 as “predatory” and very damaging. to the most vulnerable members of society. Valid alternatives exist, such as PaySauce’s payday advance product in conjunction with BNZ.
I don’t know why the government hasn’t required all payroll providers in New Zealand to be able to offer this so people can borrow, cheaply, the money they have already earned, rather than going the route of a high-interest payday loan. .
Too often it seems that “fintech” (or anything “tech”) is code for circumventing regulations designed to protect consumers, or when offering appropriate wages and benefits and paying labor taxes are considered optional.
Arguably, selling Kiwi Wealth is no different. There was a lengthy process last year to remove several default KiwiSaver providers (ANZ, AMP, Fisher Funds) after the FMA decided to focus largely on delivery cost or fees. The FMA then ordered that the balances be transferred from one provider to another.
This was done near or at the top of the market, and default members (already predisposed, by the nature of default, to be less committed with their retirement savings or financially savvy), were often placed in balanced portfolios rather than conservatives just in time to see the markets fall in the first half of this year.
So it’s somewhat ironic that Fisher Funds was allowed to acquire Kiwi Wealth, presumably regaining the default KiwiSaver status it lost in 2021.
To be clear, this is all legal and honest, the sale remains subject to Overseas Investment Office approval, and the FMA has yet to make a statement whether Fisher Funds default status is restored following of the transaction.
Hopefully that’s not more proof that the rules don’t apply to most of the city. What was the point of KiwiSaver’s review strategy last year if you could just sidestep it with a fat check a few months later?
Alternatively, if Fisher Funds does not achieve default status at the end of the process, is it fair to existing KiwiSaver members of Kiwi Wealth if their portfolios have to be moved, at their expense, to other providers? In some cases, investors would see their portfolio moved twice in 12 months without any tangible benefit.
An equally pressing question is why this transaction had to take place if the government knew it was about to buy Kiwibank. Why were the two entities not kept in Kiwi Group Holdings Limited so that the whole could become state property? Was the government running a default KiwiSaver system, was it considered a conflict (but not retail banking)?
Too often, regulations do not achieve the expected results. Consumer credit law is highly prescriptive and results in endless pages of fine print, ostensibly to protect the consumer but in reality protect the lender just as much, if not more.
They are generally not understood or even read by the consumer. So what good is this regulatory approach when we don’t simultaneously regulate, or effectively regulate, the processes that attack some of our most financially vulnerable, like buy now-pay-later (based on a technical detail) and payday loans?
These rules should be simplified. We have to recognize that payday loans and payday loans need to be regulated. The latter has no control over a consumer’s ability to pay its 1,000% interest rate.
Essentially, much of today’s regulation misses the mark or turns into bureaucracy, which provides little or no value and leaves room for people with more money and better lawyers to act. with impunity, while our most vulnerable bear the cost and only become collateral damage.
I am a believer in the old tort rule which emphasizes the test of reasonableness. The famous English contract law case Parker v South Eastern Railway, where the fine print on the back of the ticket was found not to allow the railway to avoid obligations to the customer, seems to me the sensible way to go.
If we apply a test of reasonableness, it is much more difficult for any financial institution providing any product or service to evade liability. There is no method they can prescribe, no modality they can apply, which avoids the basis upon which they must pass the test.
As a result, much unnecessary regulation and costs (ultimately borne by the client) can be thrown away, and the FMA can focus on effective oversight of capital markets. The banking ombudsman and the courts should be given the necessary powers to provide more effective and cost-effective consumer protection – a role in which the FMA appears to be lacking.
– Andrew Barnes is an entrepreneur and philanthropist, and founder of Perpetual Guardian.
Comments are closed.