GOVERNMENT must ensure banks and other financial product providers never again engage in abusive marketing and misselling of dangerous financial products to consumers.
As he recruits a panel of possible bank directors, Finance Minister Noonan should insist every bank board has at least one director who has a non-conflicted reputation for consumer advocacy and the skills to ensure bankers behave themselves.
Previous political policy which promoted the fiction of self-regulating free markets, created fertile ground for the systemic exploitation of peoples desires to improve their financial well being. The explosive growth in consumer credit could only have occurred through wholesale misselling and misbuying of credit products.
Why did so many people borrow so much and why did banks lend so much to them? What caused the catastrophic misselling and misbuying of bank credit? Why were people induced to invest vast sums in equities including bank shares? These questions remain unanswered.
There is no doubting that banks and other firms engaged in marketing quite dangerous financial products to consumers throughout the boom.
However reports into the banking crisis are largely silent on banker’s exploitation of known consumer behaviours through their marketing and product “innovation” activities.
The Financial Regulator put great store in educating people in the wise use of money and warning them of risks. But its protection efforts were always bound to fail. Knowing something, intellectually, doesn’t mean we will ever act on it. It’s why even when they know smoking kills, smokers keep on smoking. Financial education, information and risk warnings are not sufficient.
When properly understood what government officials, bank regulators, central bankers and economists consider irrational behaviour is in fact entirely rational human behaviour. No matter how well educated most of us are hopeless at mental accounting. As borrowers we have overly optimistic repayment affordability expectations and as investors’ overly optimistic capital growth expectations. Most of us don’t understand financial products and the risks we take with money and its most dangerous manifestation - credit.
Banks and others exploit this. By deliberately increasing product complexity they know we will give up trying to educate ourselves and buy their heavily marketed products. By the time regulators catch up with the latest marketing wheeze, the damage has been done. The market is full of consumer products so complex that professional advisors struggle to understand them. And if they don’t understand them, how can they recommend them as suitable for consumer use?
While the reformed Central Bank may prevent banks from ever again destroying money and wealth, will it be able to protect consumers from the exploitative marketing and selling of dangerous financial products by financial product producers and intermediaries?
And what of protecting ourselves from our own unwise use of money? How do we best protect ourselves from ourselves? Should protection be left to a state agency or should we demand our banks embed consumer advocacy and protection within the way they do business?
While product producers, such as banks, must comply with regulatory consumer protection “codes of business conduct”, these focus on product information, health warnings and “knowing your client” advisory process. As the codes do not require products to be fit for consumer use, it’s entirely possible to sell dangerous products as long as protection codes are complied with.
Product providers don’t like consumer protection codes and maintain financial innovation benefits consumers as it leads to better quality products at cheaper prices. They deliberately make their products more complex then they need be and then load them full of tricks to induce people to buy.
Yet most financial innovation increases prices and exposes people to risks barely understand and should not be exposed to. By producing ever more complex products, banks increase compliance and monitoring costs as inevitably legislators and regulators are forced to act to protect consumers.
Is putting consumer interests onto the board table and requiring banks to behave as good corporate citizens concerned for consumer financial wellbeing an appropriate response to misselling? Internationally, leading consumerists argue that producing less complex, simpler products has two benefits. Risks of misselling and misbuying of dangerous products are decreased and compliance costs are reduced. They say that it’s in a bank’s interests to ensure products are simplified and consumer’s misbuying behaviours guarded against. It seems this is an approach that could be adopted here.
This government could require banks to embed consumer advocacy values within the way they do business. State appointees to bank boards should be able to demonstrate how they will reform a culture that considers consumer protection a hindrance to profit making.
Boards could be tasked with ensuring that consumer protection is reflected within the way banks do business and consumer advocacy is appreciated, understood and practiced by management. They could be required to simplify their products and protect people from misusing them.
A version of this article appeared in the Irish Examiner, Business Edition, Monday 2nd May 2011
No comments:
Post a Comment