The financial crash was caused in large part by irresponsible financiers, who were facilitated in large part by complacent politicians and neglectful regulators. We are pretty much all agreed on that.
We focus on bad banks and bankers, but the finance industry as a whole has not covered itself in glory.
But there is another side to the story. Since the 1980s, the financial services sector has been dominated by profit chasing salespeople, but their activities have been made possible by the high level of ignorance about financial matters evident among a vast majority of the population across the world.
It is a sad fact that the spread of universal education, along with its increased intensity, has not been accompanied by a rise in financial literacy among adult consumers. Rather the reverse, one suspects.
Many appear to have lost touch with the common sense of parents and grandparents who either experienced, or learned all about the Great Depression and the war-time years of rationing.
One result was the US sub prime homeloan bonanza which ended up devastating many communities. The least financially educated may have been most cruelly taken advantage of, but the better endowed have not escaped unscathed during a financial selling revolution that benefited a few — at the expense of the wider society.
Indeed, the so-called “liberalisation” of the financial sector, a process that really started to kick in around the mid-1980s in these parts, has resulted in the application of selling techniques that are intended to bamboozle consumers of financial products.
In Ireland, we have been witness to the economic, social and personal devastation that has followed in its wake. Many individuals have been broken on the debt wheel. Families have been scattered. The consequences for peoples’ long-term health and wellbeing have yet to be fully measured. The court system has struggled to cope with the surge in debt recovery.
The country experienced several years of mass unemployment and it now carries added burdens stemming from the enforced recapitalisation of the banking system.
The sales folk are back — as the economic engines ratchet up — peddling their dubious wares. The ever present Internet, available at the tap of a phone, serves as a new insidious enabler, with more and more people transferring their activities online.
It is against this background that the Economic and Social Research Institute (ESRI) has carried out a timely investigation into the world of personal finance, drawing on extensive research, much of it conducted in the US, the great consumer marketplace where animal spirits tend to be particularly high. The report was prepared by Pete Lunn, Féidhlim McGowan and Noel Howard.
Its title is rather unusual, in the form of a posed question. ‘Do some financial product features negatively affect consumer decisions? A review of the evidence’.
The authors set their stall out in observing that firms have an “economic incentive to exploit or confuse consumers who display overconfidence, inattention”.
They look at three broad areas — credit products; investment products; and insurance. Credit products examined include credit cards, personal loans and mortgages.
They conclude that “full disclosure of information is unlikely to be a sufficient remedy as transparency does not eradicate consumer mistakes.”
This will not surprise those of us who have resisted the temptation to wade through the pages of documentation generated by the finance industry. Regulators tend to forget that ordinary people do not share their interest in analysing the small print entrails.
This comprehensive report requires some digesting, but it is written in a reasonably accessible way. Purveyors of credit cards are often the first to get their hooks on young consumers, many of whom come as lambs to the slaughter. Customers focus disproportionately on initial repayment costs. “Teaser” rates often attract people in and customers, particularly the younger and less well educated, tend to increase their borrowing as credit limits are raised.
Credit card fees are, essentially, hidden from customers. The authors have a few suggestions. Simplify how the fees are displayed. The greater the transparency, the more empowered borrowers are. Lenders should be forced to determine credit card limits by reference to the ability to pay of the particular borrower. The level of fees should be capped and a limit put on their number.
In the US, the 2009 Credit Card Accountability and Disclosure, or ‘CARD’, Act banned many credit card fees following the conclusion that they were hidden from customers.
As the authors note, “credit cards are one of the most ubiquitous consumer financial products.” They accept that they have their place, offering people a convenient and documented payment method. They facilitate online purchases and are required by some vendors for deposits and guarantees.
But many fail to come to grips with what is a highly dynamic debt repayment process. US researchers have concluded that people will spend more using cards than they would if they had to fall back on cash, which tells one something about the switch to a cashless economy which is now underway.
In fact, card-based purchasing leads to the generation of €500 extra debt per person.
Researchers have examined the impact of the ‘CARD’ Act. They conclude that measures to encourage earlier repayment by outlining the interest rate costs accumulated had relatively little impact, but that the crackdown on card fees resulted in a fall of three quarters in fee expenditure per account over a three-year period. This loss of revenue was not made up through increases in charges, fees and rates elsewhere.
Legislation can surely play its part, but consumers also need to be empowered through better education.
The report highlights the way the more naïve consumers are being targeted by providers. It cites a 2016 publication by Ru and Schoar which concludes that cards offered to consumers with lower educational attainment tend to have “back-loaded fee structures.”
Tempting low “teaser” rates are offered so as to draw people in, but there is a scorpion’s sting in the tail in the form of high late repayment, or over the limit borrowing, fees along with a big difference between the initial and final interest rate charged. The researchers found — in 2005 — that one third of interest payments by the less financially literate could be put down directly to this lack of knowledge.
Such findings lead one to conclude that there is a conspiracy by the profit chasing unscrupulous to rip off those in society who can least afford such a hit and this has much wider implications.
The State operates a well-regarded consumer advice service, but it often kicks in at too late a stage when the borrower is up to his or her neck in debt. The education process needs to begin very early on and it needs to form part of a wider drive to boost literacy.