An interesting learning this week: apparently the tabloid media declared that January is the best time for individuals to review how well they manage their finances. It would seem from the story that the levels of personal debt are at record highs and credit cards are funding extreme levels of long-term unsustainable debt at usurious rates. Unsurprisingly, this is apparently due to the fact that many of us are living beyond our means and funding the shortfall on ‘credit’.
The story then promptly proceeded with what appeared to be a paid infomercial or ‘product flog’ offering a different credit card that does essentially the same thing! So the solution is the same wrong behaviour with a different product provider! Is that how you take responsibility and control of your finances?
The tabloid media, like the Government, keeps missing the opportunity to educate the large numbers of consumers who clearly need help, although after about 10 years of Federal Budget deficits the Government is hardly in a position to lecture. The bottom line is: if you are using your credit cards for anything other than as a ‘method of payment’ you are simply not applying ‘efficient and effective’ management of your finances to achieve an outcome that is going to be beneficial for you.
Debt management is the essential first step if you are ever going to be in a position to accumulate sufficient assets to live a reasonable existence and a comfortable life in retirement. But who thinks that far ahead? Certainly not Government!
Almost everyone needs assistance to learn how to manage their finances; after all, it’s the mechanism we all use to fund ‘living’. It can be complex and getting the right advice should start early in your working life. The misconception is that you seek financial advice when you have plenty of money, but you actually need it when you have very little and looking to accumulate wealth.
It seems incongruous that Government reactively fund ‘Credit Counselling Services’ for those who find themselves in financial trouble, but do nothing proactively to assist with preventative ‘risk’ education for consumers. Nor are they willing to adopt workable policies or remove the failed and ineffective Government Legislation and the associated unenforceable compliance regime. If they did, the prohibitive costs of financial advice could be slashed and services made more accessible to the masses. The barrier for the average consumer is ‘cost’. At the moment only the wealthy can afford financial advice services. Why exclude the demographic that needs help the most?
Why do we accept that a certain socio-economic demographic are the disposable victims of the questionable practices and behaviour of the financial institutions issuing these credit cards to individuals who have no capacity to repay? How do these financial institutions continually avoid regulatory examination by the Government’s own enforcement agencies? There needs to be a conversation about the lack of regularity enforcement and how Financial Institutions manage to comply with the Credit Act or, more precisely, the lack of scrutiny around the practices, behaviour, ethics and morality of the financial institutions issuing these cards.
There was a time when Financial Institutions issued credit cards, but only after completing a credit assessment of the applicant’s capacity to make repayments, as well as looking at their character and capital position or net worth, essentially to ensure the applicants could afford the repayments and to reduce the risk of individuals getting themselves into financial trouble.
Now with increasingly smart technology and the removal of manual credit assessments to reduce costs, the product model has changed. It is no longer about preventing or reducing defaults but rather a high turnover computerised system, which is programmed for an acceptable level of failure or default rate. The higher the interest rate margin the higher the statistical default rate can be. So it’s no longer about looking after customers to prevent defaults, it’s a statistical formula for acceptable losses where the casualties are the customers set up for failure by design, usually the young, vulnerable, disadvantaged and working poor.
Technology has completely changed the dynamic of the card facility and it is questionable whether credit cards can still be defined as a ‘financial product’ in accordance with the intended provisions of the Credit Act. It’s now a ‘service’ generated by a statistically programmed computer; designed by actuaries based on probability and operated by a ‘processing centre’, not finance-trained people. The governing legislation has not kept pace with the technological evolution in the finance sector, where defaults are no longer a potential consequence but a planned inevitability. The cost of the ‘systems failings’ is clear to see: whether due to theft, misappropriation, dishonesty or default, the systems disposable casualties just add further pressure on society and welfare dependency.
The financial services industry seems to have completely dehumanised the relationship with their client. They don’t care or feel accountable to their customers, especially the ‘acceptable losers’ built into these programs. If clients are defaulting because they were not correctly assessed in the first place, then you must ask the question: how are these Financial Institutions meeting their ‘Duty of Care’ to their customers and how do they remain compliant with the Government’s Credit Act? More to the point, where are the regulatory enforcement agencies?
The fact is that financial institutions make large profits from credit cards when the interest margins and fees are so high, particularly at the moment where credit spreads (interest ‘charged’ versus the actual ‘cost of funds’) have never been wider due to the present historical low-interest rate market. I’m not against financial institutions being successful by making profits but businesses still have a Duty of Care to their customers. We need to ask whether the absence of ‘Care’ is the reason why the profits are so high and if that’s the case, I can’t help thinking that the Government has left vulnerable consumers exposed to predators whose behaviour appears unscrupulous, immoral with unethical standards. It’s a ‘numbers’ racket that would make organised crime syndicates envious.
The gap between what’s said and what’s done has never been wider, with the absence of ‘complete truth’ reflected in the length of the product disclosure documents i.e. they are what they hide. I accept that we all need to take responsibility for our actions, but financial institutions are acting as enablers, knowingly selling what they consider is an acceptable level of grief without accountability or reasonable preventative care. Shaping an orchestrated loss scenario for certain consumers feels like predatory behaviour to me. Why is the corruption of morals the only bankruptcy acceptable to the financial services industry? (See also ‘Why are Government Regulators – not working’).
25 January 2017
The time is always right to do what is right. –Martin Luther King Jr.