The following is an edited extract of the 2018 Ruby Hutchison Memorial Lecture, presented by Fiona Guthrie AM, Chief Executive Officer of Financial Counselling Australia. The annual lecture is a CHOICE and ACCC co-project.
Queensland’s Courier Mail recently ran a front-page story about payday loans. It told the story of Trina Begg, a single mother of four, who had borrowed $600 to fix her car. That one payday loan trapped Trina in a cycle of debt for five years. Those of us who have long campaigned for stronger laws to rein in predatory lending were delighted that the truth was being told.
But what also struck me were the readers’ comments. Mike said: ‘’Just waiting for the interest rates to rise and (let’s) see what damage that is going to cause to all those who never did their homework properly.’’ Suzanne said: ‘A fool and their money is (sic) easily parted. You can’t legislate for people to have common sense.’’
Whenever there is a story about someone experiencing financial hardship, many people simply blame the victim – they’re lazy, crazy or stupid. This blaming mindset might seem innocuous but such assumptions play out in dangerous ways.
Financial counsellors provide advice to people in financial difficulty. The Queensland government recently put more money into these services. Great. But it called the program “Better Budgeting”. Such inane language says to people: ‘’the problem is all yours, buddy.’’
Similarly, I’ve lost track of the number of times financial counselling is described in ministerial press releases as about “helping people to manage their money”. If only it were that simple. Nothing to do with life events such as losing your job, persistent disadvantage, lack of services, complex financial products or fundamentally insufficient income.
Simplistic assumptions come about because we don’t understand the structural causes of poverty. Living in poverty means it is hard to make anything but short-term decisions. Research by Harvard economists Sendhil Mullainathan and Eldar Shafir on the science of scarcity shows that if any of us were living in poverty, we would make exactly the same decisions. For example, when you have an immoveable deadline – say a looming exam – studying for that exam becomes your only focus. Your world contracts; other tasks are left undone. This is an example of time scarcity. Our mental bandwith – our ability to focus on other things – reduces dramatically.
Research shows that money worries and poverty replicate conditions of scarcity and reduce our cognitive bandwidth. Farmers in India were given cognitive tests before and after the annual harvest. Before the harvest farmers are poor and many have pawned goods and taken out loans. After the harvest they are comparatively rich. The study found that the farmers’ cognitive capacity was nine to 10 points lower before the harvest than after it. That’s equivalent to moving from superior intelligence to average, and from average intelligence to below average.
Imagine now that you’re living on a Centrelink income. There’s $50 left in the bank, which has to get you through the next five days. The gas bill is overdue and you have to find money for school uniforms, rent and food.
When your time horizon is just a few days, your planning horizon is now, not next year. A short-term payday loan is going to seem like a good answer. You’re not lazy, crazy or stupid. You’re just human.
So why do we persistently blame individuals for their poverty and disadvantage? The answer is partly because of our biases. One is that we don’t think the poor are like us.
Many of us also believe in the “just world” hypothesis: that by and large the world is a fair place and we get what we deserve. It is very reassuring to think you’re the architect of your own success. But it means we rarely think about the role that advantage has played in our own life stories. And it can make it easy to judge others who haven’t done so well. Because if life is a race, we don’t all start in the same place.
Many, many thousands of Australians are, like Trina was, being targeted by unscrupulous businesses. So what can be done about it? We need to start by changing the power balance. This is what Ruby Hutchison was doing in 1959 when she organised a meeting at the Sydney Town Hall to form the Australian Consumers Association – what we now know as Choice.
Ruby and her colleagues understood that the oldest conception of how our markets should work – caveat emptor or buyer beware – was manifestly inadequate. Hers was the
era of false claims and shoddy products, including exploding toasters and flame-throwing heaters. Such experiences led to the first wave of consumer policy, with the introduction of consumer protection laws including ones to tackle product safety.
The second wave assumed we were all rational consumers – that when deciding what to buy we shop around, weigh up the pros and cons, and compare prices. This wave led to long and tedious disclosure documents.
More recently, the third wave incorporates behavioural science, and is based on the sensible observation that ordinary people don’t always make decisions in the way the rational model would suggest. We should focus on how people actually behave.
But none of these three waves are adequate to tackle the problems we face in our complex markets. I believe we are riding a fourth wave – what I’m calling the people-centred wave. This wave includes elements of all the preceding waves, but recognises we have to move beyond narrow conceptions of “consumer interest” or “business interest” to behaviours that work in the interests of the community as a whole.
The principles of a people-centred wave include, at its heart empathy and kindness; and then new business models; responsibility-based regulation; and a strong consumer movement.
I’m convinced that Mike and Suzanne would change their mind if they sat down with Trina and really understood her situation. We all need to get away from our comfortable world views and talk to people. This means consciously building empathy into policy development. Listen to some calls on the National Debt Help line and you’ll hear people grappling with whether to pay their electricity bill or buy food.
We need new business structures, including more social enterprises. We need to follow the lead of the UK and change the Corporations Act to allow directors to take into account the interests of other groups, including customers, employees and the environment.
And we need responsibility-based regulation. Rather than buyer beware, reverse the onus and make sellers responsible for the outcomes they promise their customers. Businesses operating in complex markets – financial services, energy, health for example – would have to demonstrate that customers get the right product, that they understand the fees and how it works, and the product doesn’t leave them worse off.
And the consumer movement is as important today as it was in Ruby’s time. As John F Kennedy said in 1964, when setting out the Consumer Bill of Rights, consumers are the largest group in society, but also the group whose views are not heard.
So why in the end do we need a fourth wave? Because all of us want to leave the world a better, and a kinder place, for our grandchildren.