Responsible lending laws are not the only example of excessively complex financial services regulation. This was pointed out by Kenneth Hayne in the interim report of the Royal Commission on Financial Services, where he called the existing law “labyrinthine and too detailed”.
Take for example the laws on financial advice. Their overly complex design makes compliance more expensive, which increases the costs that are passed on to the consumer. This is one of the main reasons why financial advice remains unaffordable for many Australians and the viability of the industry is threatened.
Another example of ineffective regulation is laws relating to the disclosure of information to consumers when they seek to purchase a financial product or service.
The economic impact of COVID-19 means that simplifying the system can no longer be postponed.
These laws should require that information be presented in a way that is easy for the consumer to understand, as financial institutions invariably do the opposite. A major bank’s contract terms for its credit cards exceed 60 pages. If these laws exist in the name of “consumer protection”, the question arises: who are they really protecting?
Not only does this increase the cost of delivering a product, it has also resulted in a culture of consumers agreeing to buy products or services without fully understanding the risks, which can lead to poor results.
Overly complex financial services laws have a significant negative impact on productivity.
Financial services underpin economic activity. Whether it’s borrowing money, insuring risks, or making payments, the unnecessary costs or frictions of doing business or reducing consumer demand have an effect. harmful to economic growth.
While these issues are well understood by the government, the scandals and misconduct that have plagued the financial sector over the past decade have forced it to introduce new laws to help restore Australians’ confidence in this system. However, the economic impact of COVID-19 means that simplifying the system can no longer be postponed.
First step in deregulation
Treasurer Josh Frydenberg’s announcement last September to end responsible lending laws should be the first step in a deregulatory reform program to simplify the financial services system, improve access to credit and support economic recovery without compromising consumer protection.
For this, it is essential that these reforms be adopted by Parliament.
The threat of their adoption is not because the reforms are unpopular. Many individuals and businesses find the process of obtaining credit too cumbersome and frustrating, even if they can afford it.
Nor is it because the increased flow of credit is not seen as a significant catalyst for the recovery. This is recognized by both sides of politics.
The threat for these reforms to become law comes from the fact that Labor and Greens will be heavily influenced by consumer groups who believe consumer protection should be a priority across the board, including the resumption of the economy. Australia after its first recession in 29 years.
They argue that responsible lending laws are necessary to protect all consumers, regardless of their circumstances.
While the royal commission has undoubtedly revealed cases of consumer harm, we have to be careful not to extrapolate this to mean widespread damage is being done. For many years, banks have recorded distressed consumer loans, and as we progress through the recovery, the number of people paying off their mortgages looks exceptionally good by international standards.
The work takes its traditional position. But supporting consumer groups is not without risk.
If Labor succeeds in blocking these reforms, it will not only expose itself to the accusation of threatening the economic recovery by choking the flow of credit, but will also allow coalition MPs to point the finger at the ideological resistance of the Labor Party. every time one of their constituents complains that their bank has refused to give them a loan.
If these reforms are successful, it will give the government the platform to tackle other necessary deregulation reforms – bringing significant benefits to consumers, businesses and the economy.
Otherwise, it will be a significant missed opportunity that will hurt not only the recovery but also Australia’s future prosperity.