Any comprehensive banking enquiry must seek to understand product safety and their use by ordinary people as there is nothing to prevent another bout of abusive marketing and mis-selling of consumer financial service products.
Despite two reports into understanding what went wrong with Irish banks and their regulation, little effort has been expended on understanding how the abusive promotion and marketing of consumer credit products created the credit bubble. Why did so many people participate in one of the world’s wildest and most reckless credit binges?
From about 2002 an explosive growth in banks’ foreign borrowings fed a voracious demand for consumer credit –principally to invest in bricks and mortar. Irish homes were marketed as financial assets to be used to fund a lifestyle choice to live life on cheap, abundant, flexible credit. Despite clear warnings, from multiple sources, no one in power bothered to heed how a clearly unsustainable growth in consumer borrowing was a weeping stick of gelignite primed to explode. Instead Government, its public servants and think tanks, our bankers and business people marketed the “soft landing” myth.
A national obsession with property as the investment asset of choice was manipulated by powerful vested interests that have yet to be fully investigated and reported on. It is certain that Government policy created the conditions in which credit product providers and brokers were able to abusively market credit products to people - encouraging them to effectively over borrow.
Bankers should have been well aware of the risks in relying on third parties selling their products. Mortgage and credit brokers made it all too easy for people to over-borrow. Some of the largest brokers were subsidiaries of estate agents. Will there be an enquiry into the all too obvious conflicts inherent in a business model which both represented sellers and arranged mortgage finance for buyers? At the height of the property boom, brokers arranged over 40% of all mortgages with car finance predominantly sold in car sales rooms.
In August 2009 the Irish Bankers Federation, in an EU consultation document on responsible lending, wrote “The current financial crisis is due to falling confidence and restricted liquidity and is not a result of irresponsible lending to consumers seeking residential mortgages.”
Irish banks were arguing against responsible lending rules that would, according to them, stifles innovation and increase costs. They are not alone; the Financial Regulator has said it also considers product regulation as inhibiting innovation and increasing costs.
Consumerists however point to drug companies which for decades have been required to produce drugs using simple rules and disclosures. Innovation has thrived with the cost of drugs declining. Similarly cars, televisions, baby seats etc. have become cheaper, not more expensive – yet their producers are all bound by product safety rules. Not so financial products, which bankers would have us believe are so unique a category as to preclude safety rules.
Yet many financial products are deliberately designed to confuse consumers, obscure costs and trick people into using more of them. During the boom structured investment products were made look safe and actively sold as “fit for use” by credit unions and other unsophisticated investors. Unsafe, they exploded causing significant losses. Their risks, if shown at all, were buried in pages of legalese. In the same way consumer credit products were sold as a safe means to enjoy a modern consumer lifestyle.
Expert US financial service consumerist, Professor Elizabeth Warren, convincingly argues that for too long policy makers and regulators charged with consumer protection have mistakenly believed in the principle that more disclosure promotes product competition. But more is not necessarily better.
Extra fine print provides product designers ample opportunity to fool unsuspecting consumers who are tricked into buying. The same is true here, where consumerists have argued against extensive disclosure that obscures rather than reveals what is really being sold.
Emerging from the credit wreckage of the past decade, the Central Bank Commission retains its consumer protection mandate. Yet its role as chief consumer protector has not been fully investigated. Nor has there been any public debate on how consumers might best be protected. It seems the traditional regulatory policy of educating people to become responsible, informed and logical consumers prevails. This notion of the educated super-consumer who shops around and whose choices force providers to behave themselves is embedded in the principle of our consumer education and information disclosure regulatory regime.
The Commission will ditch its consumer consultative panel - a legally hamstrung group unable to achieve much since 2003, it was the only formal forum for highlighting consumer protection concerns. Addressing its changing consultative arrangements, Mathew Elderfield recently said “I am committed to a close working relationship with representative consumer bodies who share our vision, take a constructive approach in engaging with us and work with us in appreciation of the trade-offs that need to be met as we set the priorities for our consumer work”. But consumerists and regulators are not necessarily happy bedfellows. What of consumerists who do not share the regulatory vision or agree with trade offs?
It seems product providers have a ways to go before the lessons of the past ten years are applied. Only last month, a leading mortgage lender, said that people on €37,000 could borrow over four times that income to buy a house. Meanwhile some real estate agents and mortgage brokers are talking up home mortgage affordability.
There needs to be thorough investigation and report into the abusive marketing to and abusive use of credit by ordinary people. What caused so many to behave so recklessly? Just how dangerous is the mix of manipulative marketing of credit and the design of credit products?
While no one can ever hope to stop people overdosing on drugs or abusively using credit the important thing to ensure is that the products themselves are not the source of trouble.
A version of this article appeared in the Irish Examiner, Monday 21st June 2010, Business Section
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