Money Matters

It’s a shame banks and insurance companies can’t behave responsibly without the law stepping in.

As we continue to see new stories of consumers whose lives have been destroyed by scandals in our financial system, parliament is about to consider some important changes that are meant to make this less likely in the future.

These involve two of the most important recommendations of the Financial System Inquiry: the introduction of a design and distribution obligation and a product intervention power.

The design and distribution obligation is like vaccination - it is meant to prevent problems occurring in the first place.

For the first time, financial businesses will be required to design each product they sell with consumers’ needs in mind. This means, for example, that an insurance company will need to identify the types of consumers a particular insurance policy is intended to assist. It will need to make sure that it is sold in a way that means it’s likely to get to the right people. If it’s a policy that will only benefit older people, it shouldn’t be pushed upon young people. If it only benefits working people, it shouldn’t be pushed upon people with no prospect of work.

This is intended to avoid the problem that we see far too often of people losing money through being flogged insurance policies on which they’ll never be able to make a claim.

The product intervention power, on the other hand, is like quarantine - it will kick in if vaccination fails to protect the population.

ASIC, the financial regulator, will have the power to intervene where it sees a risk of harm to consumers. ASIC will be able to restrict who the product can be sold to or require changes to advertising. In the worst cases, it will be able to impose a temporary ban on the product, taking it right off the market.

These changes reflect a big shift in the way we think about the risk of harm created by financial markets. Whereas in markets for physical products like cars and appliances we have strong safety laws, which require a manufacturer to guarantee that a product is safe and allow regulators to recall unsafe products, our financial markets have lacked these basic protections.

But while it’s great to fix these gaps, isn’t it sad that this is even necessary? Wouldn’t it be better if banks and insurance companies did the right thing without being asked? Where a business has a licence from the government that gives it the privilege of selling financial services, shouldn’t the quid pro quo be that it doesn’t rip us off?

Until our financial businesses - large and small - demonstrate they can act with integrity, we need to tell them what the community expects and deserves, in law.


I think we also need a Glass-Steagall law to separate the Investment Speculation Banks from the Commercial Deposit Holding Banks. It is needed to help separate ordinary bank customers from the risks that Investment Bankers take. But this is unpalatable to many politicians and many Bankers. Integrity is missing in many places that should have it these days. When the law says the company is to maximise the profits to the shareholder then the customer is just a commodity to be used to feather the nest and is disposable/ignorable.


I think it was the ABC who had an interesting show on Iceland and how they rejected their banking model and chose not to prop up the banks which went bust due to bad decisions by the management and investment brokers.

If I understood it correctly, they now have women (with a much higher social & moral conscience) running the banks. As a consequence, Iceland has pulled itself up by the bootstraps and don’t owe outside funding bodies like the IMF anything.

(Sorry if I have this story mixed up.)

The moral of the story is that we need people running the banks who have a much higher regard for the community and less focus purely on making profits. If the bank looks after the community properly, usually the benefits come to both the bank and the community.


For most businesses, integrity is a necessity for maximum long-term success in a competitive market, as consumer behaviour will tend to reward the best businesses. However, financial service providers have long outgrown these simple factors, especially when you consider our government-guaranteed banks that offer a suite of products and services (including insurance products). I think the inertia of the big financial players and resistance to consumer-based market forces is a piece of the puzzle when it comes to the law and regulation.

The number of denied claims for life insurance is a particular area of concern, so hopefully we some some improvements in this area.