ACT: Markets need a little help from the government

Markets don’t run themselves. Well, actually, they do but if left to themselves some results can be perverse or damaging. So societies make rules for markets. Heather Roy, ACT’s deputy leader, agrees. She is making big changes to consumer law.

This is the first big outcome of the ACT-initiated re-examination of existing laws to check they meet modern principles of lawmaking. Bill English has been redefining those principles with Rodney Hide, who is Minister for Regulatory Reform.

One of Roy’s portfolios — when she isn’t off in the Army Territorial Force (she is also Associate Minister of Defence) — is Minister of Consumer Affairs.

Why do we have consumer law? Because sellers usually have far more knowledge, money, skills and leverage than buyers and far deeper pockets from which to fight common law court cases. Relying on the old “buyer beware” adage is likely to leave buyers perennially suspicious, sceptical and scared — and buying less.

The leaky homes saga illustrates that. Bad materials, bad design and bad execution in effect stole from buyers unprotected by strong law. Now taxpayers and ratepayers are helping the victims foot a very large bill because most miscreants can’t or won’t pay or have shipped out.

The legislation that allowed such grand larceny was a product of an ideology which held that self-regulation in open markets would do a better job than bureaucrats writing ever more complicated prescriptions.

Since then we have all seen the damage self-regulation of financial markets did in the United States and round the world over the past three years.

Consumer law has not left such large holes. Altogether, there are nine acts, some of them large and complicated, to protect — or overprotect — buyers. Most are more than 20 years old. Most, apart from the Consumer Guarantees Act and the Fair Trading Act, the main ones, are unknown to consumers (the others are the Weights and Measures, Auctioneers, Carriage of Goods, Door-to-door Sales, Layby Sales, Sale of Goods and Unsolicited Goods and Services Acts).

Roy wants to telescope them into three acts and modernise them to deal with internet and new services; what she calls “one law-one door”, though there are actually three. She has put out a discussion document.

Roy is not ploughing green fields. Australia has been trying to unify its hotchpotch of individual state consumer laws and New Zealand officials have contributed significantly in that process. That is because some New Zealand law is better written and targeted than Australian laws and because it makes commercial sense — for bigger Australia as well as smaller New Zealand — to have closely similar law on each side of the Tasman.

But Roy’s ploughing is part of the ACT-initiated regulatory reform programme. Her aim is principles-based legislation, which sets out a purpose and objective and leaves it up to people to decide how to comply with the principles, rather than prescriptive legislation, which spells out in detail what can or cannot be done.

Until the 1980s most legislation was prescriptive. Everyone who knew the law knew where they stood, except that lawmakers had to keep writing new prescriptions to cover unforeseen activities and loopholes. Understanding such complex law takes time and lawyers.

Principles-based law is easier for businesses to comply with though it leaves more to court interpretations, which means less certainty, and may need regulations to spell out prescriptive rules.

Roy and her officials aim to protect consumers against unfair commercial practices, selling under duress and unsafe products and to keep and police weights and measures standards. They want to “empower” consumers by insisting on good information and on guarantees, with state-backed enforcement. (Extended guarantees which some retailers offer for a fee do not give consumers any added protection, by the way.)

There are two enforcement channels: the Commerce Commission in the case, for example, of the Fair Trading Act; and “self-enforcement”, state-backed measures consumers themselves take.

Roy’s aim is three acts: an enhanced Fair Trading Act, picking up the specialised acts and modernising them; the Consumer Guarantees Act; and the Weights and Measures Act which must be prescriptive since it deals with standards.

But why would Roy and ACT want even this? ACT reveres markets. It has not condemned the “self-regulated” antics of the north Atlantic finance industries.

The reason is as old as Adam Smith. Fair traders and straight shooters are driven out of business by shysters who cut corners and rip people off — much as fund managers who continued to price risk properly during the wild bubble years lost out to the sharp set.

Without rules markets don’t operate well. The trick is to write rules that facilitate a “competitive business environment”, as Roy puts it, but minimise ripoffs and theft.

That is, Roy is promoting economic efficiency — with law even Greens might agree with.