In The Big Short, Christian Bale portrayed investor and physician Michael Burry, one of the first people to discover the American housing market bubble. Photo / Paramount Pictures
OPINION:
One of my favourite movies is The Big Short, which chronicles the events leading up to the global financial crisis in 2008.
The film shows how major financial institutions gamed the system and took on substantial risks, then were bailed out by governments because they were 'too big to fail'.
By contrast, everyday folks, especially the less affluent, lost their jobs and their homes. At the end of the film there is a summation which demonstrates that most of the bankers responsible effectively got off scot-free.
What is clear in both the movie and real life is that the whole process could have been avoided if the regulators, central banks, and rating agencies hadn't all been asleep at the wheel.
In some ways, we are living through a period which replays the events leading up to the GFC. Not only have we seen significant increases in household debt occasioned primarily by historical low interest rates, but we have also experienced a period when organisations, often ostensibly tech businesses, have exploited the naïveties of regulators and politicians to create vehicles capable of doing significant damage to our social fabric.
It is somewhat ironic that the 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 the items which might preclude a successful credit application are not subject to the same level of regulation and scrutiny.
One of the most high-profile of these is buy-now-pay-later schemes. These facilities are not regulated, primarily because these products generally do not fall within the legal definition of 'consumer credit contract' under the CCCF Act.
This subscribes to the illusion that the costs of the facility, borne through higher shop prices or default fees, are not a substitute for an interest charge.
Somewhat confusingly, the Ministry for Business, Innovation and Employment recently described buy-now-pay-later (on which Kiwis spent $1.7 billion last year) as rapidly becoming "an established form of credit in New Zealand".
I have previously argued that buy-now-pay-later is credit. To my mind, if it looks like a duck and quacks like a duck, it's a duck.
The Australian Assistant Treasurer Stephen Jones explicitly agrees, referencing the duck maxim and telling a responsible lending and borrowing summit that arguing about whether buy-now-pay-later is credit is silly - that it will be treated as credit and this should not be controversial.
On the basis of merchant fees of four to six per cent plus default fees, this is not in any way cheap credit. Annualising the merchant fees in essence demonstrates that these interest rates are equivalent to 30 to 45 per cent (before default fees).
Regulation is clearly needed in New Zealand.
The capital allocations applied to major banks to ensure they have adequate capital to meet their obligations weigh consumer loans as high-risk. Yet lending hundreds of millions to a buy-now-pay-later institution is deemed to be corporate and therefore lower risk, though it has precisely the same risk profile.
Indeed, one can argue that the mortgage-backed securities which caused the financial market collapse in 2008 are very little different from the facilities funding the buy-now-pay-later explosion. At the time of the GFC, the banks argued that having multiple home loans behind the mortgage-backed securities also made them inherently less risky.
Equally, payday lending businesses have been lauded as some of the fastest-growing fintechs, but the Government was slow to regulate the sector, and even then did not effectively eliminate a process described by the responsible Minister in 2020 as "predatory" and highly damaging to the most vulnerable members of society. Valid alternatives exist, such as the payday advance product by PaySauce in conjunction with BNZ.
I am unsure why the Government has not mandated that all payroll system providers in New Zealand should be able to offer this solution so people can borrow, cheaply, money they have already earned, rather than go down the path of a high-interest payday loan.
It appears all too often 'fintech' (or indeed anything 'tech') is code for getting around regulations designed to protect consumers, or where offering appropriate wages and employee benefits and paying tax are viewed as optional.
Arguably, the sale of 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 upon cost of delivery, or fees. The FMA then directed that balances be moved 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 engaged with their retirement savings or financially savvy), were often placed into balanced rather than conservative portfolios just in time to see the markets fall in the first half of this year.
It is somewhat ironic, therefore, that Fisher Funds has been permitted to acquire Kiwi Wealth, thus presumably regaining the default KiwiSaver status it lost in 2021.
To be clear, this is all legal and above board, the sale remains subject to Overseas Investment Office approval, and the FMA is yet to make a declaration if Fisher Funds' default status is restored as a result of the transaction.
One hopes this is not more proof that the rules don't apply to the big end of town. What was the point of the KiwiSaver review strategy last year if you can simply circumvent it with a large cheque a matter of months later?
Alternatively, if Fisher Funds does not secure default status at the end of the process, is it fair to Kiwi Wealth's existing KiwiSaver membership if their portfolios have to be moved, at their cost, to other providers? In some instances, investors would see their portfolio moved twice in 12 months for no tangible benefit.
An equally pressing question is why this transaction needed to happen at all if the Government knew it was about to buy Kiwibank. Why weren't both entities retained in Kiwi Group Holdings Limited so the whole lot could become state-owned? Was the Government managing a default KiwiSaver scheme felt to be a conflict (but retail banking services are not)?
All too often, regulations do not achieve the outcomes that are sought. Consumer credit legislation is highly prescriptive and results in endless pages of fine print, ostensibly to protect the consumer but which in reality protect the lender just as much, if not more.
They are usually not understood or even read by the consumer. Therefore, what purpose does this regulatory approach serve when we do not simultaneously regulate, or do not regulate efficiently, processes which prey on some of our most financially vulnerable, such as buy-now-pay-later (on the basis of a technicality) and payday loans?
Such rules should be simplified. We need to recognise that buy-now-pay-later and payday loans need to be regulated. The latter has no check on the ability of a consumer to afford its 1000 per cent interest rates.
In essence, much current regulation misses the mark or turns into bureaucracy, which delivers 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 become just collateral damage.
I am a fan of the old tort rule which focuses on a reasonableness test. The famous English contract law case of Parker v South Eastern Railway, where fine print on the back of the ticket was deemed not to allow the railway to avoid obligations to the customer, seems to me the sensible way to go.
If we apply a reasonableness test, it is much harder for a financial institution of any kind, providing any product or service, to avoid its responsibilities. There is no method they can prescribe, no terms and conditions they can apply, which avoid the basis upon which they must meet the test.
Consequently, much meaningless regulation and cost (ultimately borne by the customer) can be cast into the waste bin, and the FMA can concentrate on effective supervision of the capital markets. The Banking Ombudsman and the courts should get the requisite powers to provide more effective and cost-effective protection of consumers – a role in which the FMA seems to be lacking.
This article has been amended to clarify that the FMA does not, and has never, regulated consumer credit contracts.
- Andrew Barnes is an entrepreneur and philanthropist, and founder of Perpetual Guardian.
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