Kiwiblog has an interesting post on the Credit Reforms Responsible Lending Bill.
The post tackles the four main outcomes of the policy. I agree with what David Farrar has to say – and would only add that the maximum interest rate cap is very stupid, as it is the same as setting a lower than market price for some types of credit, which will lead to a suboptimal amount of lending to people who value short-term credit very highly.
My interest lies with what such a bill is missing. Education and information.
The current issue in New Zealand credit markets is illustrated by the recent Morningstar ratings that gave NZ’s fund management industry a D-. A big problem here was a lack of transparency and information.
If the government pushed organisations to provide clear, concise, and easy to digest information on risks then it would greatly reduce abuse in the whole industry.
For example, when these firms say “only 8% interest” they are confusing people – as they are charging 8% per week, when people are used to hear about the amount of interest per year. The best way to fix this is the make it that firms HAVE TO write down interest charges in per annum terms.
Education and information are far better solutions than price caps and restrictions on the ability to enforce contracts – and that is why this responsible lending bill should be heavily changed from its current format.
Update: Paul Walker takes the interest rate idea to task here – completely agree with him.