Forget regulation, let track records rule

Ask a real estate agent what price they expect a house they’re auctioning to sell for, chances are his indicative price will be a massive underestimate. For him the more the merrier at the auction and who knows, you might get your hopes up and end up joining the bidding.

The practice of underquoting has been outlawed in Victoria since February 2004 but, as The Age reported on its front page recently, it’s still rampant.

Still it beats me why we invoked the heavy hand of the state (yet again) to protect the naïve from the minor inconvenience of turning up to an auction only to be outbid. (This is while we’re promised a 25 per cent reduction in red tape.)

Even here regulation has its own unique costs and unintended consequences. Consumer Affairs brochures informing us that these transgressions have now been outlawed no doubt led some over-serious souls to have greater confidence in indicative auction prices.

Although we know that markets can’t work without well informed buyers, and that sellers have a range of incentives to conceal the truth from them, governments are still back in the Stone Age when it comes to addressing the problem.

First, there’s St Augustine’s regulation - a worthy goal that’s not enforced. Lord make me virtuous, but not yet. Then there’s St John Nepomucene’s regulation. St John is the patron saint of floods victims, but we’ll come back to him.

When governments are in “something must be done” mode, a flood of mandatory disclosure regulation is never far away. Whether it does any good it can’t do much harm, can it?

But disclosing information is not the same as informing. Sometimes it can be the opposite. Consumers can only absorb so much after which more information doesn’t inform, it obfuscates. Thus by demanding excessive disclosure in the form of client risk assessments and 40-page product disclosure statements, Financial Services Reform bamboozles investors and helps “financial planners” dress up their own commission-driven selling of investment products as independent “financial advice”, complete with government validated Financial Services Licenses.

That reminds me about St John Nepomucene. He might be up there protecting us all as best he can from the deluge. His own fate? He drowned. But I digress.

Governments have been too focused on the morality plays that drive our tabloid media. That’s not to say that we shouldn’t redress clear wrongs. Indeed prohibitions on misleading conduct provide a basic foundation for a well informed market - at least if they are enforced!

But there’s a better more positive way we should try alongside minimum standards of disclosure. The way consumers deal with their abundant ignorance is by boning up - not on the product (you can never know enough) but rather on the seller’s reputation.

I don’t need to be a computer expert or to audit the hardware and software on all the computers on offer to know that Apple products are unusually easy to use. Reputation, not first hand knowledge, is my guide.

But what if I’m choosing a real estate agent, an investment advisor, a hospital or a school?

Often I’ll have no direct experience. My “grapevine” might consist of the singular of just a handful of people. And chances are that none of them has the expertise or information to be confident of their assessment. Maybe the real estate agent just got lucky - or the obstetrician was unlucky.

We can do much better. Not by punitive action against rogues - though that mightn’t hurt - but by generating good information and getting it out there.

What if real estate agents were required to record on a website the price they told the vendor they could achieve? The website would be publicly inaccessible until after the sale. But everyone could then see how accurate the quote was.

Wouldn’t that make it easier to choose an estate agent? You could just ask them what price they thought they could achieve, and then compare bids - always alongside the accuracy of their past bids.

If you formalise this process you end up with what I’ve called the Gruen Tender, which I invented while traipsing with my cancer-riddled father from one oncologist to another. Each service provider predicts how well they’ll perform before the event and has their performance tracked against their prognosis. A real estate agency would predict the price it can get for your home, while a hospital clinic (say an obstetric delivery ward) would predict the chances of a trouble free delivery.

Over time the accuracy of these prognoses would build up enabling us correct future bids for the optimism or pessimism of previous prognoses. The result? Just as a simple auction ensures that a sale goes to the person willing to pay the most, so the highest (adjusted) bid in a properly run Gruen Tender would identify the bidder most likely to do the best job!

Should we rush out and regulate to make it so? I doubt it, at least at the outset. But governments can do a lot to encourage good practice to emerge from the competitive dynamics of the industry. (Note to Kevin Rudd and Ted Baillieu - so can Oppositions.)

Alan Fels provides an example as chairman of the ACCC. Despite raised eyebrows, he launched AAMI’s customer charter - a set of promises to customers about service standards that are audited and publicly reported upon annually. The charter has been expanded and AAMI now has many imitators.

The market should produce estate agents who’ll subject themselves to similar disciplines - not out of altruism, but to attract customers by demonstrating their quality. But right now things are too cosy. A bit of government activism in calling for such practices and public support when they emerge could get the ball rolling.

Likewise governments should ask loudly why share brokers and investment advisors don’t keep auditable “sample portfolios” of investments they recommend to demonstrate the superiority of their investment acumen. Just think of the opportunities for those in the industry who broke ranks and started doing so. (If they’re any good that is!)

And in medicine? Well governments are the major buyer of clinical health services. Why not use Gruen Tenders to award the work? That way we’d find out which hospitals provided the best service in different areas. They’d be the ones that were winning all the jobs they could handle.

So let’s get government out of the Stone Age and into that information age we keep hearing so much about. Let’s escape the deluge of mandatory disclosure regulation. And let’s forget about St Augustine and do it now!