In The Big Short, Christian Bale played investor and doctor Michael Burry, one of the first people to discover the bubble in the American housing market. Photo/Paramount Pictures
One of my favorite movies is The Big Short, which chronicles the events leading up to the global financial crisis of 2008.
The film shows how the major financial institutions gamed the system and took
at substantial risk, then bailed out by governments because they were ‘too big to fail’.
On the contrary, ordinary people, especially the less wealthy, lost their jobs and their homes. At the end of the film there is a summary showing that most of the responsible bankers got away unscathed.
What is clear both in the film and in real life is that the entire process could have been avoided if regulators, central banks and rating agencies had not been asleep at the wheel.
In a way, we are living through a period that repeats the events that led to 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 ingenuity 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. The legislation was arguably introduced for the right reasons: to ensure that home loans were affordable for applicants. However, it is strange that various elements that could impede a successful credit application are not subject to the same level of regulation and scrutiny.
One of the most high-profile is the buy now, pay later scheme. These facilities are not regulated, mainly because the Financial Markets Authority has determined that without charging interest, it is not credit. This subscribes to the illusion that installation costs, borne through higher store prices or predetermined fees, are not a substitute for an interest charge.
Somewhat confusingly, the Ministry of Business, Innovation and Employment recently described the “buy now, pay later” method (on which New Zealanders spent $1.7 billion last year) as “an established form of credit in New Zealand “.
Earlier I have argued 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’s dictum and telling a responsible lending and borrowing summit that discussing whether buying now and paying later is credit is nonsense, to be treated as credit and this should not be controversial. .
Based on business rates of four to six percent plus default fees, this is by no means cheap credit. The annualization of commercial rates essentially shows that these interest rates are equivalent to 30 to 45 percent (before default rates).
Regulation is clearly necessary in New Zealand, but the FMA sticks to its naive approach.
Capital allowances applied to major banks to ensure they have adequate capital to meet their obligations weight consumer loans as high risk. However, lending hundreds of millions to a buy now pay later institution is considered corporate and therefore lower risk, even though it has exactly the same risk profile.
Indeed, it can be argued that the mortgage-backed securities that caused the financial market crash in 2008 are little different from the facilities that financed the buy-now-pay-later explosion. At the time of the GFC, banks argued that having multiple mortgage loans behind mortgage-backed securities also made them inherently less risky.
Similarly, payday lending companies have been lauded as some of the fastest growing fintechs, but the government was slow to regulate the sector and even then failed to effectively scrap a process outlined by the responsible minister in 2020. as “predatory” and highly damaging. to the most vulnerable members of society. There are valid alternatives, such as PaySauce’s payday advance product in conjunction with BNZ.
I’m not sure why the government hasn’t mandated that all payroll system providers in New Zealand be able to offer this solution so that people can borrow, cheaply, the money they’ve already earned, instead of following the path of a high-interest payday loan. .
It seems that too often ‘fintech’ (or, indeed, anything ‘tech’) is code for circumventing regulations designed to protect consumers, or where offering adequate employee wages and benefits and paying taxes are considered optional.
Arguably, the Kiwi Wealth sale 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 primarily 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 (who were already predisposed, by the nature of the default, to be less committed to their retirement savings or financially savvy), were often placed in portfolios balanced rather than conservative just in time. see the markets fall in the first half of this year.
It is somewhat ironic, therefore, that Fisher Funds has been allowed to acquire Kiwi Wealth, thus presumably regaining the default KiwiSaver status it lost in 2021.
To be clear, this is all legal and correct, the sale remains subject to Overseas Investment Office approval, and the FMA is yet to make a statement if Fisher Funds’ default status is restored as a result of the transaction.
One hopes this isn’t further proof that the rules don’t apply to much of the city. What was the point of KiwiSaver’s review strategy last year if you can just get around it with a big check in a matter of months?
Alternatively, if Fisher Funds does not secure default status at the end of the process, is it fair to Kiwi Wealth’s current KiwiSaver membership if their portfolios have to be moved, at their expense, to other providers? In some cases, investors would see their portfolio move twice in 12 months without any tangible benefit.
An equally pressing question is why this transaction needed to happen if the government knew it was about to buy Kiwibank. Why weren’t both entities kept in Kiwi Group Holdings Limited so that the whole lot could become state-owned? Was the government running a default KiwiSaver scheme seen as a conflict (but retail banking is not)?
Too often, regulations fail to achieve the intended results. Consumer credit legislation is highly prescriptive and results in endless pages of fine print, ostensibly to protect the consumer but actually protects the lender just as much, if not more.
Generally, the consumer does not understand them or does not even read them. So what good is this regulatory approach when we don’t simultaneously regulate, or don’t regulate efficiently, processes that take advantage of some of our most financially vulnerable, like buy now pay later (on a technicality) ? and payday loans?
Such rules should be simplified. We need to recognize that payday loans and buy now and pay must be regulated. The latter has no control over a consumer’s ability to pay its 1,000 percent interest rates.
In essence, much of today’s regulation either misses the mark or becomes bureaucratic, creating little or no value and leaving room for the people with the most money and the best lawyers to act with impunity, while our most vulnerable take responsibility. cost and become collateral damage.
I am a fan of the old tort rule that focuses on a reasonableness test. The famous English contract law case of Parker v South Eastern Railway, where the fine print on the back of the ticket was held not to allow the railway to avoid obligations to the customer, seems to me the sensible course to follow.
If we apply a reasonableness test, it is much more difficult for a financial institution of any kind, providing any product or service, to evade its responsibilities. There is no method that they can prescribe, nor terms and conditions that they can apply, that will avoid the basis on which they must comply with the test.
Consequently, much of the regulation and pointless cost (ultimately borne by the client) can be thrown away, and the FMA can concentrate on effective supervision of the capital markets. The Banking Ombudsman and the courts should be given the necessary powers to provide more effective and cost-effective protection to consumers, a role that the FMA appears to lack.
– Andrew Barnes is a businessman and philanthropist, and founder of Perpetual Guardian.