Christopher Niesche: Banks must blame themselves for tougher controls

Complex documentation can end up being costly. Photo / Supplied

Hands up everyone who reads all the fine print when they sign up for a new credit card, take on a home loan or put cash into an investment fund.

Anyone?

Nobody. I thought so.

When it comes to looking after our own interests as consumers and particularly as consumers of financial products, the majority of us do a very bad job.

It's a problem that was highlighted in a recent study by the Australian Securities and Investments Commission (ASIC) and the Dutch Authority for the Financial Markets, which have together concluded that disclosure doesn't protect consumers.

It is an important finding – albeit a somewhat unsurprising one for us real human beings. It will also lead to more regulation of banks, insurance companies and investment firms.

The tougher oversight will quite likely hinder their efforts to innovate and develop new products a time when banks need to be more nimble than ever before.

But the banks have no one to blame but themselves. They had had their chance with "hands off" regulation but, as last year's banking Royal Commission revealed, they can't be trusted.

For two decades disclosure has been the basis for consumer protection in financial services in Australia, with the assumption that if consumers are armed with all the relevant information about financial products, they will make the best decisions.

Instead, the report states that financial decisions are complex and rather than bombard consumers with information they won't read and possibly can't even understand, ASIC wants companies to change their products.

It will start by forcing companies to ditch products that are too complex, provide simpler advice and better understand their customers to help treat them fairly.

ASIC and its Dutch counterpart found disclosure and warnings can be less effective than expected, or even ineffective, in influencing consumer behaviour. In some instances, it shows that disclosure and warnings can backfire, contributing to consumer harm.

Disclosure is information that legally must be provided to consumers by firms. It presents material information about the characteristics, fees and/or risks of financial products and services.

But for many companies, it provides a shield that protects them from regulators and allows them to treat their customers poorly.

Take for instance the consumer credit insurance (CCI) which is often sold with home loans, personal loans and credit cards.

It is supposed to provide cover for consumers if they can't meet their minimum loan repayments because they become unemployed, sick or are injured, or to pay the outstanding loan balance if they die.

ASIC says CCI is poor value in part, because of the strategic and confusing complexity built into the products.

Despite disclosure, many consumers who have CCI have only a shallow knowledge of the policy, and others are not even aware they have it.

Sales people use what ASIC calls "strategically complex and unfair sales tactics", such as failing to inform consumers about exclusions (which would make some consumers ineligible) and using ambiguous language to obtain consent so that some consumers did not realise they were agreeing to buy CCI.

In relation to low-value add-on insurance in car yards, consumers found the sales process fatiguing, overwhelming and rushed. Often this meant they didn't have adequate time to consider the purchase of this insurance.

"The insurance was offered at the end of a long day, when consumers had already been required to make multiple decisions – for example, about the car they wanted to purchase, what extras to include and how to finance the purchase.

"Many consumers explicitly mentioned that by the time they were offered insurance, they were expecting the experience to be over and wanted to leave," ASIC said.

Providers of high-cost, small loans (commonly known as "payday loans") were presenting compulsory warnings on their websites in ways that were likely to reduce the warnings' impact. For instance, some providers put the warning at the bottom of their web page, so the consumer would not need to scroll past it to apply for the loan. Others partially obscure the warning with an unrelated message.

These are just three of the dozens of case studies by ASIC which demonstrate how disclosure has failed consumers.

ASIC will use its new product intervention powers and design and distribution laws to force financial services companies to ditch unfair and risky financial products.

How the tougher laws play out in practice remains to be seen. Will ASIC be highly-interventionist, blocking all sorts of financial products and hampering the development of new products, which are increasingly important as banks and insurers become more digital and fight to hold market share against more nimble start-ups?

It will also likely add a layer of complexity and red tape to much of the banks' activities.

If this happens, the banks and other financial services organisations will have to accept that they brought about their own misfortune.