Finance reform

There has been a bizarre debate in Australia on whether “buy not, pay later” services like Afterpay and Zip Money should be regulated. No surprise that some in the industry suggest not. Policy advisers and politicians, as well as the media, seem at sixes and sevens … distracted by what? Fintech gobbledygoop?

But it is essential that Responsible Lending and other rules be applied to products like Afterpay.

The services are obviously a provision of credit, even though the borrower is not charged interest if the debt is paid off on schedule. In essence, under the current model with “pay later” the interest is paid by all the retail consumers who do not use the service. This is a monstrous imposition, surreptitiously applied.

It gets worse. There seems nothing to stop retailers offering exclusive discounted prices to “pay later” shoppers, subsidised even further by those who pay up front.

Retailers who allow use of “pay later” services should be required to fully recover the cost of that service from a surcharge on prices paid by their “pay later” customers.

Of course, this is what also should have been required of retailers who allow use of credit cards. The sloppiness in regulation of credit cards at the purchase point is obvious. Some retailers do the right thing and apply a surcharge for use of a credit card (though it is hard to see how some surcharges line up with the likely actual cost to the retailer resulting from the use of a credit card). But the other retailers, who do not apply a surcharge for use of a credit card, are all implicitly transferring the initial cost of the credit provision to those customers who do pay up front. That is unfair and sneaky.

The Report of the Financial System Inquiry led by David Murray was published on 7 December 2014. This is my comment, focused on regulatory reform, the topic of my paper earlier this year for the Australian Centre for Financial Studies.

“David Murray and his committee have put their energies into the urgent, the de-risking of Australia’s banks and the avoidance of the more obvious risks mounting in superannuation, but seem to have had no energy left to take on the important, the longer-term need to reform the regulators.

As far as the regulatory architecture goes, the Financial System Inquiry makes almost no significant recommendations. So virtually all the predictable weaknesses will be sustained into the next crisis. The Murray Inquiry has fallen into the same trap as the rather more revolutionary Campbell Inquiry, which failed to recommend a regulatory architecture that would limited the likelihood or extent of the next crisis. The Wallis regulatory architecture got Australia through the GFC, but only with a Wallis-free-market-philosophy-busting taxpayer guarantee of the banks. Luckily the bill was never crystalised.

The informality and clubbish weaknesses of the Council of Financial Regulators (CFR, an in-house committee of ex-officio heads of the regulatory agencies) are to be maintained, so the potential for stronger regulatory oversight has been lost. The recommendation for a new Financial Regulator Assessment Board, with ex-post review responsibilities (a revitalisation of the almost unknown Financial Sector Advisory Council, bolstered by a secretariat in Treasury) surely is only a bandaid. While the RBA and APRA have been goaded into talking more positively about macroprudential policies through the course of the FSI, the absence of any recommended change to the CFR (no independent chair and no explicit responsibility for macroprudential policy) means the likelihood of actual implementation of any macroprudential policies is now much lower again.

The FSI proposes more tinkering with powers for ASIC, very much the usual mission creep favoured by past inquiries. Defensively, Murray claims he is not recommending extra responsibilities for ASIC, only extra funding and beefed up powers, but undermines that purity by arguing that ASIC’s mandate should take competition explicitly into consideration. ASIC’s decision-making will appear yet slower and more confused and its scope will remain too widely drawn: structurally it remains set up to fail.

About the only ‘improvement’ in the regulatory architecture is another recommended non-change: the Financial Claims Scheme (FCS, a generous ex-post-funded deposit insurance scheme) is recommended to be maintained even in the face of a heightened pretence pre-crisis (for that is surely all that it ever is) that banks will be allowed to fail and taxpayers will not be exposed. Together with continued depositor preference, the maintained FCS will help protect consumers careful enough to use banks, and thereby protect the banks and the banking system (and therefore the essential structure and operations of the Australian financial system) from shadow or non-banks.

The regulators and the Government will be relying on the good sense of the Australian public to keep using the banks through thick and thin. Strangely, Murray make no recommendation to publicise the FCS, so consumers are to be left in the dark, or at least poorly informed, until after the next crisis.”