There are many ways for markets to fail, and New Zealand is a case study in most of them. Two of the most corrosive are information asymmetries and moral hazard.
In an information asymmetry, a seller knows more about the value of a good or service than the buyer, or vice versa, so a fair exchange is almost impossible. Moral hazard is where a company or sector takes on risks knowing they can shift the consequences of failure on to a third party, almost inevitably the public.
National’s new Minister of Commerce, Scott Simpson, has found a way to deliver both of these failure modes while undermining the integrity of the legal system itself. It’s only taken one horrible piece of legislation: an amendment to the Credit Contracts and Consumer Finance Act. The proposed bill introduced to Parliament on March 31 will retrospectively change the disclosure laws for banks and other financial institutions, protecting two of the nation’s most profitable banks, ANZ and ASB, from a huge class action brought by Russell Legal over excess fees.
Clever companies will always find ways to bewilder customers out of our money. Did you ever wonder why supermarkets have such a constant, seemingly random series of discounts and sales on their most commonly purchased products? One effect is we never know the fixed cost of an item, so won’t notice the steady, incremental price increases the grocery companies subject us to beneath those fluctuations. It makes us less likely to choose a cheaper product or shop somewhere else.
Finance and investment is one of the most dangerous areas for consumers. We’re entrusting people with mortgages, inheritances, life savings and pensions, and it’s nearly impossible for civilians to have the same level of expertise as the legal and accounting teams of large financial institutions. If you’ve refixed your mortgage recently, or tried opening a new account for a child, you’ve invested hours signing elaborate contracts while bank staff incant long declarations and disclosure statements to you. This is government mandated, trying to bridge that informational asymmetry between banks and the rest of us.
Fees & grievances
In 2014, the government introduced a set of mandatory disclosure laws around interest costs and lending fees. If a lender failed to observe the rules they would forfeit their interest and fees on that transaction. Both ANZ and ASB appear to have breached the rules and are subject to claims on behalf of 173,000 customers for redress.
The banks complain this will amount to an outrageous sum for a trivial error. Like everyone faced with a legal penalty, court cost or fine, they feel aggrieved.
Unlike the rest of us, they’ve wisely invested in legions of retired MPs, former Beehive staffers and ex-press gallery journalists to lobby Parliament on their behalf. So the government has generously elected to retrospectively rewrite that law to minimise their legal liability.
Why? Ostensibly the government is “cutting red tape,” but every minister knows they will someday be an ex-minister looking for a job, which might make them more inclined to help out potential future clients who’ll be grateful for favours performed.
This is an awfully big favour, though. One of the fundamental principles of the legal system is supposed to be certainty.
Undergraduate law students are routinely taught Harvard legal theorist Lon Fuller’s dictum that retroactive laws are not laws at all because they fail to guide behaviour. They undermine the legal system’s very function—to set standards by which people may govern themselves.
It isn’t the first-time Parliament has exercised its power to travel back in time and rewrite its own legislation. In 2004, Labour’s Foreshore and Seabed bill retrospectively extinguished components of Māori customary title, and in 2013, National retrospectively denied family members caring for disabled relatives the right to sue the Ministry of Health for support funding.
Both were considered legally outrageous; both were overturned when each government was voted out.
Bad messaging
At least you could say the laws were protecting the taxpayer from legal liability. This new amendment does not even reach that threshold.
The government is protecting the shareholders of the most profitable businesses in the country, and sending the message that politically influential entities do not have to follow the law of the day because, in the event of expensive litigation, the government will simply change the rules in their favour.
The current government has decided to prioritise growth, and some of its ministers are slowly realising – to their horror – that much of our poor economic performance is because of the enormous power and market concentration enjoyed by the nation’s largest companies.
Like a heroine in a horror movie who has locked the doors and windows, then realised the killer is inside the house, it is becoming apparent that many heroes of the business community are the villains of economic development.
This puts National – the party of big business – in an awkward position. It’s now trapped between protecting the integrity of the legal and financial systems – both vital for genuine growth – or indulging the demands of the banks.
It’s choosing the latter, continuing a trend that began with the fast-track law and seems set to continue, signalling that the nation’s laws can be waived if the price is right.
The pretext is always economic growth, but nations with such a flexible approach to legality tend to get poorer rather than richer. Their politicians do very well, though.
