Lessons have not been learned from the regulatory and banking debacle writes Bill Hobbs
It appears that consumer protection is being sacrificed in efforts to rescue banking and rebuild the financial regulatory system. With attention focussed on dealing with the legacy of wholly inadequate banking regulation, little attention has been paid to wholly inadequate and deeply flawed consumer protection. Why did so many people recklessly borrow without regard for the risks they were running? Could it have been prevented? Should people be protected from banker’s abusive manipulation of consumer behaviour in the use of credit and marketing of dangerous products? Failing to protect consumers is a blindspot few are prepared to acknowledge including some who claim to have acted as consumer champions.
The Government’s “Central Bank Reform Bill” reflects this extraordinary blindspot in thinking. Consumer protection is to be relegated to poor man status. It’s being split in two. The Central Bank Commission will ensure banks behave themselves and the National Consumer Agency will be responsible for consumer information. Protecting people from dangerous products and unfair and unreasonable pricing, terms and conditions have been left off the table.
Re-combining central banking with prudential regulation makes some sense. However combining prudential regulation with consumer protection is like mixing oil and water. The overriding mandate of a prudential regulator is to ensure safe and sound banks not to protect consumers. When profitable, banks are safe and sound. Thus it’s argued consumers are best protected when banks are profitable. Which one wins out – bank profit or consumer protection? Of course, prolonged abusive selling of credit leads to boom bust cycles and causes bank and banking systems failures. But this is not the same as regulating for dangerous products. In the US leading consumer advocates now maintain consumers have to be protected from buying dangerous financial products abusively sold to them by banks.
At least €20bn is to be incinerated in the bad debt furnaces of INBS and Anglo. More will be burned off by Nama. Billions more will be borrowed to fund bank re-capitalisation. The costs are explicit – taxes will be raised to repay borrowings and public services will suffer. But what of the hidden banking bail out tax – the additional interest rates, fee and charges that will be levied by banks to rebuild their businesses.
Are interest rates, fees and charges to be increased without due regard for consumer protection? Are banks to be given a free ride to ratchet up charges to consumers who will have no choice but to pay as competition will be absent for years to come? The stark reality is that the new banking system will be an oligopoly dominated by one or two big banks. Has any consideration been given to known profit taking behaviours of dominant providers of banking services and the consequences for ordinary people? If, as some people maintain, this is an unavoidable consequence then why not allow for a citizens participation in future profits through direct citizens shareholding in the banks. This way when and if they do “come good” ordinary people might claw back the hidden tax they will have to bear.
Since established in 2003 the Financial Regulators consumer protection performance has been at best patchy. It introduced (and continues to congratulate itself on) consumer protection codes and spent a lot on advertising. But it was fancy expensive marketing wallpaper that hid structural fault lines. Soft bank regulation also meant soft consumer protection. When a leading mortgage broker was publically exposed for arranging liar loans and a leading consumer bank exposed for selling dangerous products to the elderly, the regulator’s response was to beat the soft drum of its codes. Its own Consumer Panel missed the implications of an explosive growth in bank lending to consumers and their all too obvious marketing abuses.
There are three lessons from the boom; consumer behaviour in using credit is almost always imprudent – people have to be protected from themselves; regulating banks behaviour is wholly ineffective – it doesn’t work nor does informing consumers; banks market credit products abusively, enticing people to borrow more then they can afford to repay – dangerous products have to be regulated. Despite these lessons nothing is being done to properly protect consumers from their behaviour in buying dangerous credit and investment products. Nor is anything being done to prevent the abusive marketing of dangerous products by banks and others. Rather emphasis remains on consumer education and existing protection codes with a nod to the Financial Ombudsman, who can only act after the horse has bolted.
Prophets of boom time free market cronyism and soft regulation are becoming the gatekeepers for a new orthodoxy that seeks to apportion all blame to the Fitzpatrick’s and Fingleton’s. An entire system banking; banks, regulators, government officials and ministers aggressively promoted an unsustainable credit fuelled consumption boom and brooked no criticism. Last weeks bank CEO pension saga is symptomatic of a deeper problem - lessons have not been learned.
For years the Financial Regulator was telling people how effective its consumer protection efforts were. From 2002 onwards banks engaged in reckless and abusive marketing of credit products to consumers without a murmur from the Financial Regulator. Instead it practiced a form of consumer protection that is deeply flawed -bank regulators believe that rational, informed, educated consumers will collectively act to regulate banks.
The erroneous belief that you can educate people to use money wisely to the point where they become super-rational consumers prevails within Governments response to date. It reflects in part an orthodoxy that did nothing to prevent an asset bubble and uncontrolled explosion in consumer credit.
No wonder then that consumer protection is being set to one side. The prophets of the boom time orthodoxy blissfully ignored the known consequences of credit fuelled consumption booms founded on asset bubbles. And they are blissfully ignoring the lessons. Rather than consigning consumer protection to the bailiwick of the new central bank commission it should be separated out within a financial service consumer protection agency empowered to assert the rights of ordinary people’s access to safe financial products at affordable rates, terms and conditions.
A version of this article appeared in the Irish Examiner, Business Section, Monday 26th April 2010
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