Consumers pay a high price for protection

Samuel is right on the money. Graeme Samuel, Chairman of the government consumer “watchdog” the Australian Competition and Consumer Commission (ACCC), has uttered heresy. Consumer groups want him to wash his mouth out with soap. Why?

He says some consumer protection hurts consumers. Samuel argues that, where markets are competitive, the Trade Practices Act generally does all you’d want. Section 52 says firms “shall not mislead or deceive”. As he says, “you cannot put it any clearer than that”.

So how can additional consumer protection hurt consumers? First, a declaration of both interest and expertise. In 2000 I kicked off discount mortgage broking in Australia by founding Peach Home Loans. Mortgage brokers sell loans like supermarkets sell fridges. We help people identify suitable loans and then process their application. The service is notionally “free” as lenders pay us an up-front commission. They also pay us a “trailing commission” of a tiny fraction of the loan balance for the life of the loan.

But just as you can get fridges more cheaply from discount department stores, so you can get the same loan from us as you can get from other mortgage brokers. Then, because our margins are lower, we pay you a rebate. Our rebates vary with loan size, but average around $1,000 for the average loan of $250,000.

As in other industries, some brokers do the wrong thing. Some consumers are openly misled. Other consumers are pressured into unsuitable loans. More generally many consumers are encouraged to think that brokers are unbiased advisors who will get them the best possible loan. The truth is otherwise. Just like fridge salesmen in Harvey Norman, brokers are usually honest, but they only deal in the products that earn them a commission.

To address all these problems I welcome consumer regulation. It should improve consumer information, help resolve disputes and drive rogues out of the industry. Instead, it’s being driven by the politics of consumer advocacy and media scripts in which consumers are always the goodies and business the baddie. Ultimately, that’s hurting consumers.

Here are two examples.

Responding to loan inquiries is expensive. As a discounter we seem to attract lots of “shoppers” and “tyre kickers” who take up our time, but don’t really intend to proceed. We get “shy types”, who conceal various skeletons in their cupboard like a former bankruptcy. In each case we waste lots of time - which can only be funded from higher margins on successful loans.

In the past if we suspected this we could request a small refundable deposit of $20 to sort the sheep from the goats. But guess what? NSW regulation now “protects” consumers from paying deposits - however small, however refundable. And more comprehensive national broking regulation is under active consideration.

So we’ve had to reduce our rebates instead. Protecting consumers from small, refundable deposits protects them from the higher rebates we could otherwise afford.

This is just the tip of the regulatory iceberg.

We’d like to try a radical experiment which would cut deeply into home loan interest rates. As with the sale of fridges, everyone in the sales chain for loans makes a margin. We’d like to offer loans without that margin, instead charging for our time like an accountant would.

Then, genuine borrowers would save on interest - perhaps up to 0.5 per cent - throughout the whole term of their loan, occasionally parting with a fee charged on an hourly basis if they wanted to change some detail of their account.

But if we did that, a lot of people would get upset - even if we told them the rules beforehand. They’d go to the industry ombudsman. Now I’m in favour of the ombudsman having agitated for its introduction before one existed. It’s much fairer and more efficient at dispute resolution than our scandalously ramshackle court system. It will help drive rogues from the industry.

But ... because the Ombudsman was designed to appease consumer groups, its founding assumption is that consumers are always the victims - never businesses. So its costs are met by the businesses consumers bring before it.

In five years we’ve never been taken to the Ombudsman. But if we were, we’d be charged $200 for the initial referral, a further $2,000 for conciliation and then another $5,000 for the Ombudsman to rule! That’s even if we successfully defended ourselves! The consumer won’t pay, no matter how vexatious or outrageous their conduct, no matter how unreasonable their expectations of us.

Again, there’s nothing wrong with this situation that a small deposit refundable on a successful outcome couldn’t solve to deter frivolous complaints.

So you can you see why we’re not falling over ourselves to rock the boat with this new style of lower margin “fee for service” lending? Most consumers are very reasonable people. But given that even if we win all our cases, each unreasonable consumer can cost us over $7,000, we won’t be taking any chances by upsetting the apple cart.

In the meantime if you’ve got an average loan think of this. Consumer protection is “protecting” you from paying around $50 a month less, on your loan.