This week I was invited by the Parliamentary Committee on Trade and Industry to give evidence on bank charges and interest rates. Instead of writing my normal column this week I am using an extract of my presentation to the committee.
I told the committee that I do not support legislation that attempts to regulate bank charges or fair, market-related interest rates, but that Government does have a role to play to ensure that there is a free market in which consumers can make informed decisions and know that action will be taken against cheats. Even the great capitalist icon, the United States, intervenes to ensure a free and competitive market.
Competition is starting to happen on an increasing scale but it is being brought upon the banks by outsiders, rather than being innovated amongst themselves.
Although there is no firm evidence of cartelism, the banks often behave as if this is the case. The banks often seem to act in concert. For example, they resisted money market funds paying higher interest rates to consumers; they have until recently been uncompetitive in the area of home loans; there is no competition on credit card rates s as there is in other countries. The banks are complacent about developing really competitive, finely priced products until such time as there is an outside competitor. If there was real competition surely the innovation would come from them?
Government should intervene in a number of ways to ensure proper free market conditions and consumer protection:
* Competition law: Government should improve competition law and police it far more strictly to ensure there really is a free market. Among other things a close watch should be kept on the activities of organisations like the Banking Council.
* Alternative banking: Government should investigate and implement laws which would ease the way of alternative banking structures. For example co-operative banks, including agricultural banks, grew into the backbone of the banking industry in Europe. In Brazil there is a remarkable bank called Bradesco, which grew from very similar conditions that we have in South Africa. Ways should be found to harness and formalise the huge stokvel movement into a low cost, low service banking empire and to use PostBank to service the lower income market.
A properly regulated micro-lending industry also has huge potential as a low cost, low service, savings and loans banking empire;
* Consumer protection: This is a massive subject and entails more than codes of conduct promising mother love and apple pie that are not strictly policed. A lot more has to be done to enforce disclosure and get rid of bad practices and products.
* Disclosure: Consumers have a right to know the details about financial products. Disclosure by banks is poor.
* Regulation: There is a regulation void in this country on the retail side of the financial services sector. The financial services industry talks glibly about self regulation. If the financial services sector, including the banks, wants meaningful self regulation why have they not already jointly or severally implemented it?
Government should effect a statutory framework for regulation built around a powerful ombudsman's office.
Some years ago, after bad publicity, the banks appointed an ombudsman. The ombudsman just happened to be the chief executive of the banking council. No one ever saw a public report of the ombudsman. Recently a lawyer was appointed to the post but we are still waiting to see his first report.
The office of the ombudsman should not be industry-appointed and controlled. One of the main reasons is that even in the cases where there are good appointees, like Judge Jan Steyn, the Ombudsman for Life Assurance, their powers are constrained.
One example is a formal complaint to the ombudsman about the manner in which Fedsure subsidiary, Norwich Life, changed its bonus paying policy. Norwich is not arguing the merits of the case but is rather attempting to have the complaint squashed by using the technicality that the ombudsman is not empowered to hear complaints of this nature.
The other problem with the current ombudsman system is that it assumes that there are clear cut divisions between different parts of the financial services industry.
Government should establish a properly resourced ombudsman's office, which would cover the entire financial services industry. The office should have extensive powers, which should be both reactive as well as pro-active. These powers should include:
* Ensuring proper codes of conduct;
* Ensuring levels of proper and understandable disclosure, particularly of interest rates, costs and commissions;
* The right to decide on areas of dispute and to order compensation to anyone who has been unfairly exploited;
* The right order the withdrawal of bad financial products, such as the endowment linked mortgage loans;
* To investigate and punish, by way of fines, any institution found guilty of improper marketing;
* Order, in conjunction with the SA Reserve Bank and/or the Financial Services Board, the temporary or permanent withdrawal of a trading licence of any company which is involved in malpractices; and
* Remove the licence of any intermediary or intermediary organisation guilty of poor selling practices. (In this context all intermediaries should be licensed with licences being on different levels depending on the products being sold).
The office should be funded from fines and by fees levied according to the number of transgressions committed.