Why Aussie banks want to keep us in the dark
THE Royal Commission has rightly exposed extraordinary allegations of despicable actions from financial institutions who we thought we could trust.
At the core of what banks have done is exploit the trust that we've all given them from a young age.
But how did we become so vulnerable and how have they managed to get away with it?
Among the reasons they've been able to pull the wool over their customers' eyes, is that we've been raised in a country where so many of us never really got a decent financial education.
This lack of financial literacy has left many Aussies vulnerable to exploitation.
In our confusion, we've turned to the banks to help us make sense of the mortgages, superannuation, credit cards and insurance policies that we can't quite get our heads around. And the banks saw us all coming.
They filled this knowledge vacuum with marketing programs for their own products and its been a toxic mix. As a result, not only have we handed our money over to banks, but we've handed over the way we learn about it too.
For many of us, letting banks teach us about money started with opening Dollarmite accounts in school as kids. They built trust by getting children to hand over their pocket money to space aliens, and we've fallen for the tricks ever since.
The bank's mortgage calculator says I can borrow this much money? Great, I'll have the lot. They're offering me a credit limit increase? I'd better take it, just in case. They must really trust me with so much money! The kids want a guarantor to get a loan? Well I guess the guy at the bank said a lot of families are doing it.
One particular area of concern where it's been shown that many of us just don't get it, is when it comes to "interest-only" home loans.
Frighteningly, UBS estimates that one third of borrowers with these interest-only loans don't actually realise they're not paying off any of the principal. Even if they do, many more also don't realise that the interest-only period usually only lasts a few years. Once it expires, repayments rocket up as the mortgagee suddenly has to start paying off the principal.
One couple, Ian and Michelle Tate told ABC's 730 that after purchasing several investment properties, they discovered this the hard way.
"We weren't actually told what the terms were, how long the loan was a going for."
Unable to afford the rises, they face an uncertain financial future. Should the bank have explained things better? Of course it should. But our education and understanding of these issues can't start the moment we walk into the bank and place our trust in them.
We need to be armed with a better financial know-how years before we're sitting at the bank manager's desk.
Another problematic area is when borrowers have massively underestimated their living expenses in order to qualify for higher loans.
They've been given the nickname "liar loans".
UBS estimates that $500 billion has been leant by Aussie banks to customers who gave information that was "not completely factual and accurate" in order to get a mortgage.
Sometimes part of the problem has been trusting a tool that the banks use, a system known as the Household Expenditure Measure, or HEM, which tends to provide a lowball estimate. Customers who have leapt into big loans without providing genuine consideration of whether they can really afford them, or by trusting bank's assurances have entered a world of trouble. The bright brochures always have pictures of happy families moving into their new home, never the pictures of a desperate family forced to move out, after defaulting on their mortgage.
One more area of concern is a lack of understanding when it comes to well-intentioned family members acting as guarantor on loans, often for their children. Many times it works out, and those for whom it does have much to be happy about.
But when it doesn't work out, the consequences are enormous and care tear families apart. The Royal Commission heard one example of an elderly woman who got into enormous financial difficulty and almost lost her house after acting as guarantor for her daughter's loan without understanding the consequences.
"I would have signed anything for her," Carolyn Flanagan told the Commission.
Phil Khoury, who reviewed the Code of Banking Practice for the Australian Banking Association told the Commission that "it was very clear people were wanting to help family members or associates and getting themselves into a highly risky position they were not clear about."
Again, many people just don't understand what they're getting themselves into and the banks exploit the knowledge vacuum. Yes, we need to come down hard on banks for being complicit in all this going on. Yes, we have to ask where the regulators were and why its taken a Royal Commission to reveal the entire picture of this mess.
But we also need to ask, what's happened to our financial literacy as a community, and how can we improve it so we're not so vulnerable to exploitation again.
Part of the answer is a better informed population in an environment where our education about money starts early, continues through life and comes to us independently, rather than through the marketing practices of banks themselves.
We need better structures in place so that we understand the complexity of loans, super and insurance long before we sign up and we need checks in place to be sure that we know the consequences before we make the leap.
In the same way that we promote education and support programs on mental health issues we need a broad spectrum approach to education and support for our financial health.
If we don't look after the latter, many more will have problems with the former.
And most importantly, any education, awareness and financial literacy campaign needs to be thoroughly independent.
The banks have been the tutor and the salesperson for far too long.
Knowledge is power and if we all know more, we'll all be better off.
There will be fewer people losing their homes when they default on their mortgages and less drain on the welfare system when things go pear shaped.
In a nutshell, there'd be fewer bankers getting rich because they know the system and fewer of ya getting poor because we don't.
I think we'd all be happy to see that.
- Chris Urquhart is a freelance journalist. Follow him on Twitter: @chrisurquhart