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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.

Alan Kirkland, CHOICE CEO
Twitter: @AlanKirkland