In The Big Short, Christian Bale portrayed investor and medical scientist Michael Burry, one of the first people to spot America’s housing bubble. Photo / Paramount Pictures
One of my favorite films is The Big Short, which chronicles the events leading up to the global financial crisis in 2008.
The film shows how large financial institutions have tricked and taken over the system
with significant risks and were then bailed out by governments because they were too big to fail.
In contrast, ordinary people, especially the less affluent, lost their jobs and homes. The film ends with a synopsis showing that most of the bankers responsible actually got off scot-free.
In both film and real life, it’s clear 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 a way, we are living through a time that repeats what happened before the GFC. Not only have we seen a significant increase in household debt, driven largely by historically low interest rates, but we have also seen a period when organizations, often ostensibly tech companies, have taken advantage of the naivety of regulators and politicians to create vehicles which can cause significant damage to our social fabric.
It’s ironic that recent consumer credit laws are making it increasingly difficult for Kiwis to buy their own homes. The law was arguably introduced for the right reasons – to ensure home loans are affordable for applicants. However, it is strange that a number of issues that might stand in the way of a successful loan application are not subject to the same level of regulation and scrutiny.
One of the most popular of these is the “buy now, pay later” scheme. These facilities are not regulated, mainly because the Financial Markets Authority has determined that without interest charges it is not a loan. This reinforces the illusion that the investment costs, borne by higher retail prices or overdue fines, are no substitute for interest.
Somewhat confusingly, the Department for Business, Innovation and Employment recently described how ‘buy-now-pay-later’ (on which Kiwis spent $1.7 billion last year) was quickly becoming ‘a mainstream form of lending in New Zealand’.
I’ve argued before that buy-now-pay-later is a loan. In my opinion, if it looks like a duck and quacks like a duck, it’s a duck.
Australia’s Deputy Treasurer Stephen Jones strongly agrees, referring to the duck maxim and telling a responsible lending summit that it’s foolish to argue about whether “buy now, pay later” is credit – that it is considered credit is dealt with and this should not be controversial .
Measured by dealer fees of four to six percent plus cancellation fees, this is by no means a cheap loan. Annualizing merchant fees essentially shows that these interest rates equate to 30 to 45 percent (before default fees).
There is a clear need for regulation in New Zealand, but the FMA is sticking to its naïve approach.
Capital allocations for big banks to ensure they have sufficient capital to meet their obligations weigh consumer credit as risky. However, a loan of hundreds of millions to an institution that buys now and pays later qualifies as a business and is therefore associated with lower risk, despite having the exact same risk profile.
In fact, it can be argued that the mortgage-backed securities that caused the financial market collapse in 2008 are little different from the entities funding the buy-now, pay-later explosion. At the time of the global financial crisis, banks argued that having multiple home loans behind the mortgage-backed securities also made them inherently less risky.
Likewise, payday loan companies have been hailed as some of the fastest growing fintechs, but the government has been slow to regulate the sector and even then has not effectively eliminated a process described by the responsible minister in 2020 as “predatory” and extremely harmful to society’s most vulnerable . There are valid alternatives, such as B. PaySauce’s payday advance product in partnership with BNZ.
I’m not sure why the government hasn’t mandated that all payroll system providers in New Zealand should be able to offer this solution so that people can borrow the money they’ve already earned cheaply instead of going down the high-yield payday loan route.
It seems all too often that “fintech” (or “tech” for that matter) is code to circumvent regulations designed to protect consumers, or where offering decent wages and benefits, and paying taxes are seen as optional .
Selling Kiwi Wealth is arguably no different. Over the past year, there has been a lengthy process to remove several default KiwiSaver providers (ANZ, AMP, Fisher Funds) after the FMA decided to focus primarily on delivery costs or fees. The FMA then ordered assets to be transferred from one provider to another.
This happened near or at the top of the market, and defaulting members (who by the nature of the default already tended to be less concerned with their retirement savings or financially savvy) were often timely invested in balanced rather than conservative portfolios see the markets fall in the first half of this year.
It is therefore somewhat ironic that Fisher Funds has been allowed to purchase Kiwi Wealth, presumably regaining the default KiwiSaver status it lost in 2021.
To be clear, this is all legal and proper, the sale remains subject to Overseas Investment Office approval and the FMA has yet to issue a statement as to whether Fisher Funds’ default will be restored as a result of the transaction.
One hopes this isn’t yet another proof that the rules don’t apply to the big end of town. What was the point of last year’s KiwiSaver review strategy when you can just bypass it with a big check 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 to other providers at their expense? In some cases, investors would see their portfolio moved twice in 12 months with no tangible benefit.
An equally pressing question is why this transaction had to take place at all when the government knew it was going to buy Kiwibank. Why weren’t both entities held in Kiwi Group Holdings Limited so the whole thing could become state owned? Has the administration of a standard KiwiSaver system been viewed as a conflict by the government (but not retail banking)?
All too often regulations do not achieve the desired results. Consumer credit legislation is very prescriptive, leading to endless pages of fine print that purports to protect the consumer but in fact protects the lender just as much, if not more.
They are usually not understood or even read by the consumer. So what purpose does this regulatory approach serve if we do not simultaneously regulate, or not efficiently regulate, processes that some of our most financially vulnerable businesses exploit, such as: and payday loans?
Such rules should be simplified. We need to recognize that buy now, pay later and payday loans need to be regulated. The latter has no control over a consumer’s ability to afford their interest rates of 1000 percent.
Essentially, much of the current regulation misses the mark or turns into bureaucracy that brings little or no benefit, leaving room for those with more money and better lawyers to act with impunity while our most vulnerable bear the cost and become mere collateral damage.
I’m a fan of the old tort rule, which focuses on a reasonableness test. The famous English contract law case Parker v. South Eastern Railway, in which the small print on the back of the ticket did not allow the railway to shirk its obligations to the customer, seems to me the sensible way forward.
If we apply an appropriateness test, it is much more difficult for a financial institution of any kind offering a product or service to shirk its responsibilities. There is no method they can prescribe, no conditions they can apply that circumvent the basis on which they must pass the test.
As a result, many pointless regulations and costs (ultimately borne by the client) can be thrown in the bin and the FMA can focus on effective capital markets surveillance. The Banking Ombudsman and the courts should be given the powers they need to ensure more effective and cost-effective consumer protection – a role that the FMA seems to lack.
– Andrew Barnes is an entrepreneur and philanthropist and founder of Perpetual Guardian.