Finance and regulation go hand in hand like Fish and Chips.
Unfortunately, the financial services industry is setting itself up for a greater portion of chips on its plate as signs indicate institutional behaviour is unlikely, and possibly never will be, self-modifying enough to curb regulator meddling.
Virgin Money is just one example of why there will always be a role to play for regulators.
Last week, one financialservicesreview.com scriber received a letter from Virgin Money highlighting that the person in question wasn’t perhaps fully maximizing their credit card use, despite the $10,000 limit on it.
The helpful team over at Virgin suggested a limit increase to $15,000 – how considerate!
Forgive us if we’re mistaken, but isn’t the main reason the financial system drifted perilously close to oblivion – akin to the 35,000-ton ship destroyed by a Force 8 gale in the Strait of Gibraltar a week ago – due to loose lending?
The problem, it seems, in an industry always striving for greater yield and profitability is that groups are constantly seeking to grow at the expense of competitors.
Unfortunately this bodes for a culture whereby groups tend to push for the maximum allowed under the law, and regulators are forced to step in (in theory) to prevent the industry going to far.
OK, the example of Virgin writing letters to its customers may in fact be a carefully considered growth strategy by Virgin whereby default risks are carefully assessed.
However recent CoreData research of both the residential mortgage and business banking sectors reinforces just why Australians have a seemingly in-built resentment towards banks.
Interestingly, the mortgage arms of many banks are still aggressively pursuing lending growth while the business banking arms are behaving more conservatively as we head into a downturn of economic activity.
In many cases those seeking a residential mortgage or refinance were offered more than they were initially seeking, while many small businesses struggled to even get accepted for any finance without undertaking a laborious process to reassure there businesses could withstand a downturn.
What this suggests, is that banks are all too willing to push consumers into financial stress – as in the case of mortgages, they have the collateral of the house as insurance.
Yet banks are less willing to throw their money around when the only guarantee is that of an underlying business.
At the end of the day self-regulation, at least in relation to responsible lending practices, initiatives are unlikely to succeed as corporate paranoia means groups are so fearful of losing market share they will lend as they wish so long as it meets their objectives rather than any broader socio-economic issues.
Watch this video, for an interesting angle on how corporations operate.