The financial sector in the Netherlands is too powerful

The financial sector in the Netherlands is too powerful

On October 12th, 2015, the Scientific Council for Government Policy (WRR) has it report "Society and financial sector in balance" presented to the Minister of Finances. In this report, the WRR exposed an unbalanced relationship between the financial sector and society. The conclusions are not smooth.

The Council states that in recent decades the influence of the sector on the economy and society has increased significantly. For example, financial products and instruments play a very important role on the citizens, companies and (semi) governments. There is so far but limited attention to the fact that society has become highly dependent on the financial sector. That mere fact, the WRR argues, requires a reconsideration of existing policy. The Council, therefore, refers in particular to the tax facilitation of financial products, such as mortgages. This facilitation promotes the use of it. The ultimate result is uncontrolled growth in the financial sector. The society is very vulnerable due to its greater dependence on the financial sector for disruptions in the financial sphere. We have known about that since the outbreak of the financial crisis.

The WRR considers it desirable that society is in a better relationship with the financial sector. It needs to become more resilient to balance out the financial sphere. The WRR, therefore, advocates a more effective financial sector policy, in addition, to the policy that affects society. Financial stability and the financial services themselves are fundamental to the functioning of society. In short, this is a role for political intervention.

The changes in the relationships between the financial sector, the economy and society have led to a number of social problems. The first core problem is the inherent instability of the financial sector. Financial crises are expensive. The rescue operation in 2008 cost the government and thus the taxpayer tens of billions. However, individual citizens also suffered heavy losses from the banking crisis. When investments plummeted in value. The crisis was also dire for the housing market. The value of houses plummeted. Businesses were faced with sharply declining economic growth and depleting credit facilities.

But there are also costs in non-crisis situations. As a result, the financial sector has too much credit in an emerging economy and excessive squeezing occurs during recessions. Secondly, there is a major dominance of the financial sector in the economy and society. So households, businesses and semi-governments are exposed to a multitude of financial products. Moreover, they are due to high debts or (pension) savings, which were extra sensitive to developments in the financial sector. Because of this, the financial system has been leading rather than following or facilitating.

Third, the financial sector reinforces short-sightedness in the economy and society, making short-term financial incentives more important than long-term considerations. The hyperactive behavior of the financial world sets long-term orientation in the real economy and society under pressure, while this orientation is necessary for making investments in human and physical capital.

The Council notes that the aforementioned developments and the ensuing problems have led to a tense relationship between the financial sector and society. Which the Council does not consider it desirable, because of the tensions between the financial sector falls short in its contribution to the economy and society. This places the Dutch society and politics under a difficult circumstance. On the one hand, the Council advocates one more robust financial system supporting economic development. On the other hand, it is important to make society and the economy more resilient and less dependent on the financial sector.

A recurring theme in the report and the reason for concern is the excessive dependence on the society of the financial system. That reduces the resilience to it disturbances. For example, the more people borrow for housing, the greater the effects of interest rate movements on the cost of the loan. The current size and composition of Dutch private debt, concretely high mortgage debts of households, create vulnerabilities. That has been the case since 2008. The Council, therefore, believes that a critical Consideration should be given as the incentives to enter into debt, but also as barriers to equity financing.

It is now a known fact that households, companies as well as financial institutions deviated fiscal incentives to enter into debt instead of opting for equity financing. This incentive for debt financing contributes to the Dutch debt mountain and discourages the use of risk-bearing (ie equity) capital. It is clear to the Council that, first of all, there is one equal treatment that must come from equity and debt. For households, this means that future tax reform could be considered normalize the tax regime for new mortgages to be concluded, by housing and transfer mortgage (to box 3) with a partial exemption for the lump sum yield tax. With the current low-interest rates, this has virtually no effect on the affordability of housing

In addition to reducing the financial dynamics, the Council believes that it is necessary to strengthen the negotiating position of citizens and businesses. In short, more counterweight is needed. Customers of financial institutions should be able to trust the services and products they purchase and that financial institutions can be approached clearly about this. In addition, it is important that they can inform themselves well about the advantages and disadvantages of different types of financial services so that they can make good choices in these areas.

The Council, therefore, sees a major role for independent information. In practice, however, it appears that the information came from the providers of the financial products. It will not be easy to update that independent information and bring it to the citizen. It could lend a hand if that independent information fits in well with the perception of the consumer.

A more fundamental step is to give customers a stronger position towards financial institutions. Although information and independent advice important for that, they cannot be the only answer. According to behavioral science research, it shows that the effect of information on human choice behavior should not be overestimated. Modern information technology could possibly help with this, for example, the reviews of customers on review websites of restaurants and hotels can be found. It is, therefore, one empowerment, which could offer perspective. This strengthens the negotiating position of the consumer because it provides a frame of reference.

Consideration could also be given to strengthening the negotiating position in joining forces on the consumer's side. Just like the Consumers' Association that collectively purchases energy for participants, can become comparable structures to set up financial products, the Council suggests. Consumers would benefit when there are effective and visible social "watchdogs" that represent the interests of consumers.

Finally, the WRR believes that the sector itself can also contribute to the position to strengthen the consumer. Of course, there is already such a thing to protect the consumer, but the Council does not go very far in those efforts. Enforcing transparent products should become more centralized. The duty of care, which is included in Dutch legislation, prohibiting financial institutions from selling customers complex products that do not suit the customer. This is nice in itself, but it is not clear how this compares to product properties that hardly have any value for the customer, which does not lead to extra returns for financial institutions. The WRR rightly thinks that complex products are hardly ever in the interest of customers.

It, therefore, seems desirable to oblige financial institutions to achieve some standardization of products. Institutions would like certain products to offer a standard version, supplemented with a description of how optional products deviate from this. This is possible and also a good method to increase the effectiveness of information provision. The standard product serves as a benchmark so that the "extras" in the optional products stand out and are easier to understand.

It is better late than never. In a lengthy report, the WRR explains that the average consumer or entrepreneur is not a part of the financial sector. The knowledge advantage is simply too great, as well as the hunt for returns and profits. Yet the WRR is also critical of the consumer or entrepreneur. They are too gullible and do not bother enough to obtain independent information, although it is available. The financial sector seems to be barely changing, as the council claims. It does not expect absolute salvation on the part of politics either, so the consumer has to join forces to defend their interests whether it be usury policies, incomprehensible structured products, or overpriced mortgages.