Alberta Business MarketingMar
1
2010
Jul
31
2009
Question: Should governments regulate interest rates charged by businesses?
The Case: The Government of Alberta recently moved against excessive interest rates by prohibiting payday loan companies from charging more than $23 in fees and interest for each $100 borrowed. Meanwhile, Senator Pierrette Ringuette of New Brunswick says she will ask the Senate Standing Committee on Banking to investigate credit card interest rates which typically approach 20%. There’s a religious term for charging excessive rates of interest: usury. The practice is morally condemned by all major faiths. In practical terms, though, as governments limit interest rates, regulated lenders may leave their highest-risk borrowers at the mercy of less desirable, unregulated lenders.
The Panel:
Ken Chapman: a lawyer, principal in Cambridge Strategies Inc., a public policy consulting firm, and blogger
Ron Ghitter: a Calgary businessman, retired senator, former Alberta MLA
Janet Keeping: a lawyer and president of the Sheldon Chumir Foundation for Ethics in Leadership
Janet Keeping: It’s a tricky question. I can see why the public wants action taken against companies that impose much higher than usual interest rates. But I have a real question as to whether regulation of interest rates is the answer.
One obvious reason why regulation might not be the answer is that when people need money, and can’t get it through more normal channels where much lower interest rates would be charged, really tight regulations might drive people into the hands of completely illegal sources of such money. And then if they’re not able to meet their debts, really nasty things may ensue. I worry that if you curb legal sources of loans, then what happens to those people who are driven to extraordinarily high-interest loans?
Another reason as to why regulation might not be the answer is that I don’t know how you choose the number above which interest is illegal. I don’t know how you can reasonably figure that out. So if regulation is not the answer, then what is?
What I see as a solution is a serious effort – more serious than any we’ve made to date – to educate the public and empower people on money management. Anyone who can get a line of credit at a bank or credit union, and who is still paying debt on a credit card, is missing a golden opportunity, because the gap in interest rates is really huge. I don’t think some people have the economic or the financial savvy to take the rational way out. I don’t think that the Alberta government stepping in this way is a significant advancement. I think it’s a sop to public opinion. I don’t think this limit of 23% on interest is very meaningful.
Ken Chapman: I think that this is really something that requires regulation, so I’m glad that the government has acted. The idea of regulating interest rates is not new. It goes back to biblical times. Even in recent times, there has been legislation like the Unconscionable Transactions Act, which allows the courts to decide when interest rates are excessive. The question is whether businesses, other than the payday loan companies, should get involved in this. My sense is that they won’t. They will see this as an issue between the payday loan sector and the government. They will not get into it because they will see it as a morality issue. If they did get into it they would have to do it on the basis of the question of when usury begins.
I think that you’re going to see business leaders primarily duck this and not be proactive at all. It’s going to be a regulated situation with the regulations being more and more directly enforced, with more and more inspections. It’s worth noting that payday loan operations are not even allowed in Quebec.
However, I do know that the Government of Alberta did a pretty broad consultation on this issue. They included street people, the working poor, homeless people and others who tend to use these kinds of services. They found that the average income of the big users is between $20,000 and $40,000 a year. These are people who don’t think they can qualify for bank services, or are intimidated by banks. There’s a real need for some fiscal literacy here. If you want to solve this, regulation and legislation is one part, but you have to make sure that people are well taken care of and that they understand that they can go into regular banks and get their cheques cashed and have bank accounts.
What drives people to these kinds of operators is that they want loans, and they don’t think that they can get loans from banks or credit unions. They stay because it becomes faster and easier for them and they don’t realize that they are being used.
The other side of it is that I think that we should be doing a better job of regulating the financial industry, not just interest rates. This recession was caused by the greed and the corruption of the financial sector in the United States. In Canada we take great pride in our banking system because it looks so good compared to everybody else – but only compared to everybody else.
Listen to the interviews that shaped this column, August’s Right Call Audio Collection, now.
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Jul
1
2009
Question: What can business people do to reverse the eroding public perception of the free enterprise system?
The Case:
The public image of business, particularly big business, has rarely been so deplorable. While most business people try to make an honourable living by offering products and services that contribute to employment, wealth creation and community development, those who play the capitalist system as if it were a greed-driven game without rules have tarnished the reputation of all enterprises. The sorry record of scams, frauds and consumer ripoffs by everyone from the financial services industry to the electric power industry has attracted a tsunami of government intervention and re-regulation. With the media piling on, legislators vow to break up the “Old Boys club,” where deals made between buddies at the golf club glide through boardrooms with nary a thought to conflicts of interest, or of how close they come to crossing the lines of legal limitation.
The Panel:
James K. (Jim) Gray: a Calgary businessman and chair of the Canada West Foundation
Janet Keeping: a lawyer and president of the Sheldon Chumir Foundation for Ethics in Leadership
K.C. (Kim) Mackenzie: a professional urban development consultant and CEO of Mackenzie Associates Consulting Group Ltd.
Jim Gray: The vast majority of business people are entirely ethical. On the other hand, there is no questioning the conclusion that a few bad apples have tainted the barrel. We live in an increasingly litigious world, and the unfettered greed that seems to be prevalent these days in a minority of sectors has been just dreadful. It’s brought increased regulation. It runs the risk of stifling competition. We’re getting to the position where governments are going to start picking winners and losers. That’s a terrible consequence of this malaise.
Janet Keeping: My first answer to the question about what business can do is to convey to the public and to government that you and your colleagues in your business are straight shooters and not con artists. I think good business people should be supporting necessary and well-thought-out regulation. Some of the businesses and business people I know have always taken that view. They know a lot about what needs to be done. They know that good regulation is important because it levels the playing field. Then you don’t have other, less ethical operators cutting corners, bringing the whole industry into disrepute and maybe creating another catastrophe like the one in the [global] financial sector.
Kim Mackenzie: I do think that business has been getting a black eye, but I also believe that a lot of it is well-deserved by the system and some of the unscrupulous people that operate within the system. At the base of it, I think it was a distancing of the people who manage large corporations from the people who are affected by what they do, in particular shareholders. …The resulting lack of accountability that occurred as a result of senior management’s being so removed from reality and from the people they’re supposed to be serving left the managers of these organizations operating in a bubble where they didn’t see anything except what worked for them.
The many who are slogging away and doing their own thing according to good rules can be tarnished by the reputation of people who haven’t performed admirably. They can be restrained by rules, such as the Sarbanes-Oxley Act which came in to regulate certain things, and which many business people say, over-regulated in certain cases. [SOX, enacted in the United States in 2002, was a reaction to scandals like Enron and WorldCom. It set criminal penalties for companies and executives guilty of fraud.] It’s an illustration of the rebound effect where the pendulum can swing too far one way toward less regulation, and then it swings back too far, or more than it really needs to in the other direction to the extent that it can be hard on a lot of people who didn’t need to be harmed or controlled.
Gray: Self-regulation has not worked. Everybody is, to a degree, greedy – not necessarily always for money or power, but there is a greed in the human dimension. It gets out of control from time to time, and this time it went way too far, so it has to be reined back in. There’s no silver bullet in all of this. We in business have to be much more effective communicators. We’ve got to participate in the public debate, more than we have in the past. We’ve got to be much more transparent.
Keeping: The thing that strikes me about the great ethical fiascos of business over the last few years is those who say that government should get out of the way, that those problems have been a function of government intervention. It’s preposterous! It’s clear that we were into the world of voodoo financing where anything goes. If you could spin a story and get somebody to buy your “product,” then you made money. What we found at the end of the day was, of course, that the bottom fell out and a whole great big chasm opened up and the world economic system – not all of it, but a lot of it – has sunk down into it.
We’ve been under the influence of a very powerful ideology. The ideology has been grossly mistaken because the ideologues supported unrestrained capitalism. Well, you can’t have unrestrained capitalism. You have to have rules.
Listen to the interviews that shaped this column, July’s Right Call Audio Collection, now.
If you’d like advice on a compromising situation (no names used), send details to feedback@albertaventure.com, or login to this site and post a comment.
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