Universal default

Abstract: The consumer credit market is broken. Businesses have learned to exploit customers' systematic cognitive errors, selling complex credit products that are loaded with tricks and traps. Because customers cannot see or understand complete credit terms until it is too late, the market no longer operates to achieve competitive efficiency. Instead, creditors engage in a race to the bottom, boosting profits by offering ever-riskier products that families are poorly equipped to handle. The consequences are serious: Americans are sinking deeper in debt each year, and defaults, foreclosures and bankruptcies are on the rise. The regulatory framework that once controlled consumer credit is now in tatters. From colonial times until 1979, state-based usury laws were the central feature of consumer protection. In 1979, a Supreme Court interpretation of ambiguous language in a national banking law effectively ended state usury laws. Congress could easily have reversed the opinion by clarifying the language, but it turned away while this critical consumer protection vanished. By the 1990s, product innovation from payday lending to universal default to creative mortgage financing took root largely outside the purview of any regulatory body. Truth-in-Lending laws, which were designed to supplement usury protection, failed to keep pace with market changes. The Federal Reserve, the Office of the Controller of the Currency, the Office of Thrift Supervision, and other federal and state agencies regulate various financial institutions, but the mission of these regulators is aimed squarely at protecting the banks and the stability of the overall financial system, with scant attention to consumer protection.

Abstract: Informed choice is essential for the choice of superannuation fund objectives to be met, but significant barriers to informed choice presently exist. These barriers include an absence of relevant information disclosures by superannuation funds and the greater problem of members who are unable or are unwilling to exercise choice. While the first barrier could be overcome by establishing standardised measures of fund performance, the potential problem of large numbers of workers not exercising choice requires rethinking the default option. A possible solution is the establishment of a universal default fund.

Abstract: Up to a quarter of the retirement savings of some Australian workers are being eroded by excessive fees, according to this study. Fees and commissions on superannuation cost the country more than $14 billion per year – or around half the total cost of paying the age pension. These enormous administration costs will inevitably place a greater burden on taxpayers as more retirees come to rely on the pension because of insufficient savings. The case for a universal default superannuation fund reveals how a shake-up of the superannuation system could lead to some wage-earners being up to $100,000 better off upon retirement. “There has never been a proper debate in this country about the issue of superannuation fees and how to minimise them. This paper is designed to help open up that debate,” said Research Fellow Dr David Ingles. “Evidence clearly shows that most people simply accept the default option offered by their employer. Many don’t even realise how much of their money is eaten away by fees.” Administrative costs of 1.35 per cent can reduce final super fund balances by up to 27 percent, or over $130,000 for a worker on the average wage. By contrast, a low-cost passive management fund could slash administrative fees by half or more, increasing final payouts considerably. The Institute’s proposal is to provide a safety net for those workers who are not currently protected by an adequate default fund through their industrial agreement. At present, between six and 16 per cent of the workforce are at risk of being placed in a high-cost account if they do not make an active choice about their super. The universal default fund would be open to any worker who wanted to opt into it and take advantage of the very low fees it would charge. It could also be used to address the problem of ‘lost’ and multiple accounts. Policy-makers have failed to provide a permanent fix to the multiple accounts issue, even while commercial super funds profit enormously from fees on inactive super accounts. The paper also proposes that super funds who want to charge fees of more than one per cent be required to seek permission to do so from each member affected. “This would ensure that high fees are being charged only with the informed consent of fund members,” concluded report co-author Josh Fear.

Abstract: Introduction 899 I. Problems with Boilerplate 901 A. Assent 902 B. Readability 903 C. Fragmentary Contracts 904 D. Choice 905 II. Credit Card Account Agreements 906 A. Context 906 B. Ramifications 910 III. Responding to Problems with Credit Card Agreements 915 A. Running in Place 918 1. Invalidate Unconscionable Terms Ex Post 918 2. Regulating Information 920 B. Moving Forward 922 1. Prohibit Specific Terms Ex Ante 922 2. Standardized Terms 927 Conclusion 932