Ever-extending regulation

In the rush to regulate –  that seems to characterise all our governments these days – it was announced yesterday that government plans to legislate to give the force of statute law (complete with penalties) to “do not knock” signs on someone’s front door.       What next?  Statutory penalties for, say, people who dawdle down Lambton Quay at lunchtime trying to text as they walk, or any of the many other minor social irritants?

But the initiative that particularly caught my eye was a proposal to legislate to fix the maximum cost of “high cost” credit at no more than 100 per cent of the value of the loan.  Borrow $500 and the total interest and fees you will ever pay will be capped at $500.   Apparently (judging from the high level material the minister published) regardless of how long the term of the loan is.  That seems more than a little incoherent, even granted the inevitable good intentions of the minister and his officials.

When I first bought a house, floating first mortgage interest rates were (according to the RB website) 15.5 per cent.   Admittedly, there was still a fair amount of inflation in the system at that stage.  But when I bought my current house in 1995, the inflation target was 1 per cent and the average floating first mortgage interest rate was 10.64 per cent.   On a 25 year table mortgage (from memory what was typical term back then), at that interest rate a mortgage calculator tells me that I’d have paid $373000 in interest alone on a $200000 mortgage over the life of the loan.    Mortgage rates of 10.64 per cent probably seem quite foreign and implausible today, but if it happened before –  with an inflation target lower than today’s –  it can happen again.  In fact, ANZ’s Visa interest rate –  over which they have full security of your home if you happen to have a mortgage with the same bank –  is currently 20.95 per cent.   If it took you eight years to steadily pay off a debt at that interest rate you’d also have paid more than 100 per cent of the initial loan in interest.

As I understand it, the government’s proposal won’t apply to mortgages –  even though the lender has much better security than is typical for one of the target loans.  Perhaps it won’t even apply to credit cards, although if so the logic of any such distinction escapes me.

I’m not unsympathetic to the concerns that probably motivate these reforms. I come from a tradition that for centuries (even millennia) looked askance –  as I still do –  on charging any interest rate to those in need.

Exodus 22:25       “If you lend money to My people, to the poor among you, you are not to act as a creditor to him; you shall not charge him interest.

I hugely admire the work of people like the Kingdom Resources Trust (among its services are some interest-free loans).

But it is hard to see how the government’s proposed cap, imposed quite without regard to how long the loan is outstanding for, is either just or efficient.

There looks to be quite a bit of discussion in the Regulatory Impact Statement of the possibility that some restrictions would severely reduce the availability of credit (they cite one particular UK intervention which it is estimated to have reduced the number of people using “high cost” credit by 40 per cent over 18 months).  And yet, absent any robust analysis suggesting that lenders in these sectors are making consistent excess risk-adjusted profits, it is hard to see how the effect of any binding restrictions is not going to be to restrict access to credit.   And restricting by total interest cost –  regardless of the term of the loan –  seems to have little going for it.  The impact on a two-day payday loan (which the document seems concerned to protect) will be less severe than that on someone who might –  rationally – need a loan for a year to cover a new fridge or a new set of tires for the car, or even the expenses of some culturally significant festival.

The government’s proposals (summarised here) aren’t just about capping the total interest expense, but about adding numerous layers of other regulation, including yet further extension of “fit and proper person” tests in which bureaucrats get to decide, subjectively, who is a suitable person to run a business.

To repeat, I’m not suggesting there are no issues here, or that some individuals don’t find themselves in exploited situations.   And yet, for example, we know that housing costs are one of the major contributors to financial pressure on lower income households, and after a year in office the government has done absolutely nothing substantive to fix the rort that governments themselves impose/facilitate, that render urban land so outrageously unaffordable to large portions of our people.  And there is no strategy to lift productivity growth, the only sustainable basis for higher incomes.    Imposing ever more regulations –  that will bear heavily on small entities and probably won’t much bother the large operators – is a headline-grabbing response, but it does little about the underlying problem.

It is also hard not to conclude that the ever more pervasive net of regulation is partly a reaction to the decline of the numerous intermediate institutions of society –  trade unions, extended families, friendly societies, churches, lodges etc –  which once helped people get through tough times, and helped vulnerable people cope with life generally, without the ever-expanding panoply of intrusive, inflexible, and costly government regulation.

13 thoughts on “Ever-extending regulation

  1. If it applies to student loans, where compounding interest is charged on loans when the borrower is overseas, quite quickly the outstanding debt could double.
    Presumably it wont apply to outstanding IRD debts which include quite severe penalty payments.
    Good in theory – bad in practice.

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  2. Laws should be set on broadly defined principles and then case history should allow them to grow and develop organically as the legal system confronts the vagaries of life.

    A wise legislator recognises that no-one can foresee the future.

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  3. I’ m really hesitant about that approach: it is the way of the “living constitution” that has created the politicised monster that is the US Supreme Court and associated nomination/confirmation process. I’d rather have politicians make fewer, but quite specific, laws than have an unaccountable “committee of ex-lawyers” (Prof James Allan’s term for higher courts) make our laws.

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  4. Say it as it really is

    It’s the non-enforcement of the existing laws – Don’t need any more law – just enforce the existing laws first. The Commerce Commission is front and centre of this and its the same problem with their inability to enforce market laws over petrol (we don’t have the power)

    This furore has been generated by the Mobile Trucks industry which flouts the Credit Contracts and Consumer Finance Act (CCCFA).

    “The Minister of Consumer Affairs Kris Faafoi met budgeting groups in Gisborne yesterday as part of a review of the Credit Contracts and Consumer Finance Act (CCCFA). Many truck shops were not abiding by the law, so harsher enforcement could curb this, Mr Faafoi said”

    Newsroom and Mobile trucks
    https://www.newsroom.co.nz/2018/07/01/135264/loan-sharks-the-time-has-come

    The main problem exists in two localities
    The dominant (and probably exclusive) activity is in South Auckland and West Auckland, targeting Pacifica and Maori. It’s in the government’s interest to threaten and jawbone – if they don’t it results in greater welfare assistance – what actions are the most economical

    The test is enforcement of the law.

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  5. You trivialise the ‘do not knock’ practice. It would actually protect elderly people who are pressured by sales people. For example, in Kapiti a Spark rep wouldn’t leave my parents house without seeing their Vodafone bill. But because my father had a Spark mobile he got himself in the door and got to see the phone bill. It took days to undo the result of the visit, including getting Spark to take some responsibility for their training and hard sell practice when it comes to poaching Vodafone home customers. So it’s not just poor brown people who can be targetted.

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    • I wasn’t intending to trivialise the individual abuses, more to suggest that there are numerous different areas in life in which people can be taken advantage of by others, or make really bad choices, and there are limits to what we should legislate. In many cases, those most in need of protection from themselves and others will be the least likely to put such “do not knock” signs up. Without a robust child (for example) someone who feels unable to simply close the door on visiting salespeople (or Mormons) will probably not be likely to follow through on pursuing a complaint under the new “do not knock” laws.

      Personally, if there were areas that could be pursued aggressively, I’d probably rather use legislation or govt resources to pursue phone scammers (who are both annoying, and threatening – a relative of mine recently got quite a long way thru the process with one, and even I recall briefly being taken in by the first I ever had).

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  6. When it comes to loans, as with all of life, the question is how far do we go to protect adults from themselves? I’d have thought it was in the interest of both the borrower and the lender to ensure the borrower was in a position to make good the repayments. At the very least this would require some due diligence by the lender who is placing their funds at risk. Provided the transaction was based upon mutual consent, absent coercion, then I see no reason for the State’s involvement.

    Besides, even Israelites were allowed to charge interest to foreigners. Deuteronomy 23:20

    Trump’s insistence that every new regulation only be implemented after two existing regulations were removed from the statute books has much to recommend it.

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  7. It’s difficult not to feel empathy for those whose horizon extends no further than today, who have no understanding of deferred gratification, whose personal circumstances and choices have brought them destitution and poverty.

    However, who of us believes there a political solution, a revised policy setting that can fix this?

    If MSD wipes the debts, surely that would encourage some/many beneficiaries to pursue even more indebtedness, with the (not unreasonable) expectation that the government will eventually forgive the loans.

    If benefits are raised closer to the wages received in paid employment, the incentive to work is diminished, and the number of beneficiaries will increase.

    These are intractable problems with no easy solution in sight.

    The best hope lies with NGO’s like the Kingdom Resources Trust, whose help is personal, specific and conditional. Unless the someone is engaging with the ‘whole person’ and regularly in contact with them, then attitudinal and behavioural change is unlikely to take place.

    Simply providing more money is usually not the answer.

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  8. Government Insanity

    Petrol costs in Auckland have been loaded up with more costs by Government, Central and Local, for good reason. Auckland is full and grid-locked and grinding to a halt. This morning another fatal crash on the Northern Motorway brings half the city to a halt.

    The effect of these petrol price increases: Assume many of the poorer lower socio-economics, underclass, inferior people are living at the edges of their capacity to survive financially, then :-

    In the very short term The added cost of daily travel to and from work will be cannibalised from either their rent or food budgets. Then food costs will begin to increase as manufacturing and distribution costs rise. In the intermediate term these same people who live in central or middle-distance suburbs will begin to move out to outer suburbs in search of cheaper accommodation. They may have to give up their jobs to do so. Then there will be pressures on Government Welfare budgets as more and more applicants apply for unemployment. In effect the Government will be the instrument of the fate of these people

    In the longer term the results of these increased travel and living costs will result in increases in welfare

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    • It’s possible that commuters who are hard hit by the about 10% (tax plus higher costs to the fuel companies) increase in the cost of petrol will be hard hit and take it out of their rent or food payments, it’s also possible that it could come out of fewer takeaways or cigarettes.
      It will certainly hit poorer people harder. Just like the proposed subsidy on electric cars will benefit richer people more as they’re the only ones who can afford to buy these cars.
      Both interesting policies for a left of centre government.

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