Contractual certainty - banks need to play by the rules as well

Legally, banks are probably already living in this world. Most loan contracts are probably void for uncertainty. So why hasn't a court stepped in to strike down these contracts?

It is because our legal system is too expensive. No one in Australia has the money and inclination to take on the banks in court. The banks would draw out the litigation, making it a million dollar plus dog fight.

More interesting, is why there haven't been louder calls in the community for the government to regulate interest rates. In Australia we have an intellectual and political deficit when it comes to calling for change and an over-willingness to accept change inflicted on us.

We are too trusting of politicians and institutions. When our government increased the retirement age by two years recently there was not a beep. When the French government did the same thing last month, the country almost went into civil war. This is because the French don't trust the mantra from their government and value leisure time. The middle-class comfort enjoyed by most Australians coupled with our uneventful political and social history has placed us into a political and intellectual slumber.

The only solution is for the government to legislation. It is not that hard. Here are the clauses:

"After a loan contract has been signed a financial institution cannot increase the interest rate more than the size of a rate increase by the RBA during the term of the loan."

Next clause is:

"If during the period of a loan, the RBA reduces the official interest rate, this must be passed on in full to the customer".

This would still mean that during the life of a loan, there would be fluctuation in the rate. But the change is pegged to an objective measure (RBA movements), which gives the contract the certainty that is required by law.

Any action less than this by the government is an abdication of its responsibility to community. No amount of shaming, embarrassing or telling off the banks will work. For institutions that lack a moral and social conscience, the only lever that works is coercion, in the form of clear legal regulation.

To date, the only embarrassments on this front are Wayne Swan and Julia Gillard whose tough rhetoric, do nothing approach has even the bankers laughing, all the way to the bank.