Progressive Turmoil

This is an interesting idea, though somewhat utopian…

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I quite like that our no-fault ACC system kills off a big market in disputes. GDP is lower, because lawyers and experts would otherwise transact through markets, but so what? Do we really want that kind of GDP?

Moral hazard might be an reason: some people go nuts if they’re not controlled properly. But wouldn’t  most of those people also be testing the boundaries of a competitive fault-based system? I don’t see that we lose much from the no-fault system.

Incidentally, no-fault does also seem to work in competitive insurance markets – much as bill-and-keep works between telcos.

This is an interesting question for IO geeks. At present, we Kiwis collectively own & operate a no-fault insurer, the ACC, which has a statutory monopoly in several big insurance markets.

From this starting point, the merits of opening some or all of ACC’s domain to competition depend (in part) on a value tradeoff between

• Economies of scale because of risk pooling effects (which is a pro-monopoly effect); and
• Quiet life effects on productive efficiency (pro-competition).

God (or ACC or Treasury) might know how large these effects are but as ignorant owners, what kind of goals should we set for a reform process?

I’d want to see if we could bank the scale benefits and then use market-like mechanisms (i.e. incentive contracts) to encourage productive efficiency. Done well, a layer of competing service providers might be able to deliver good value, as it does for rubbish collection and for credit card services.

I look forward to the details.

There are two things I don’t understand about anti-paternalism: the branding strategy/scope; and the connection with democracy.

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maybe only to a credit card geek…

The Commerce Commission has settled everything in its prosecution of Visa and MasterCard and all the banks in their capacity as members of those networks. It (the Commission) incurred costs of $6.6m over the three years it spent preparing for the trial which has now been aborted. Multiply that by about 8 to take account of all the defendants and you have a bill of about $50m.

And on the benefit side? Well there are 3 main points. First, interchange is still set centrally (which was the basic competition complaint – the thing that made this look like a cartel) but now by offshore profit-seeking networks (Visa and MC have both demutualised in recent years), rather than by local committees with good information on competition and market conditions in NZ. These cental interchange fees are unlikely to fall and may well rise over time IMHO. So no gain there.

Second, banks can negotiate bilaterally and the Commission has extracted “committments” from the banks that involve

significantly reducing the average interchange fees charged on New Zealand credit card transactions, ensuring that these fees in New Zealand are driven downwards from the rates that were centrally set by the Visa and MasterCard schemes

These sound very much like behavioural undertakings, so I wonder if this is a precedent to the use of such undertakings in other areas, such as merger clearance applications. In any case, logic suggests that if there is a maximum price that card issuers can charge for interchange, they will do that. Will be very interesting to see if there are deviations. Personally I’m sceptical of any real gains from this.

Third, merchants are allowed to “surcharge” meaning they increase the price when you present a credit card. Again, I don’t see much change. Those who can already do (eg taxis) and I’d expect retailers to be quite careful about where and when they surcharge, for fear of annoying their customers or driving into the arms of rivals who do not surcharge.

So overall, this case has been a disaster: huge expense for very modest gains at best.

If you are at a loose end in Auckland on Monday, pop along to the High Court for the opening shots in an intellectual test match, and one of NZ biggest cases in recent times. Some time later (the hearing will take months) a selection of the best IO economists in the world will show up for a hot-tub session that will be even more fascinating.

The case pits the Commerce Commission, joined in this instance by a group of retailers, up against most of those involved in supplying credit card services in NZ (e.g. the banks), but with the notable exception of Visa and MasterCard (who have settled) and American Express (who was not sued in the first place, for interesting, and IMHO relevant reasons).

The charges are being brought under the competition provisions of the Commerce Act (s30 and s27 in particular). They allege cartel-like conduct, particularly in relation to “interchange”. Interchange is the source of the benefits delivered to credit cardholders, such as free credit for a month, frequent flyer points etc.

This litigation was started almost 3 years ago and has cost many tens of millions of dollars so far. I anticipate having plenty to say once the case is over, but until then, mum will probably be the word.

Talk about frustrating.

Since 1924, when a motorcyclist was unfairly tried in England, the principle of open justice has been recognised in the idea that justice should not only be done, but also be seen to be done. It implies avoiding even the perception of some kind of conflict or corruption.

Everyone makes mistakes, and a somewhat random sample end up in court as a result. That sample of course includes some of those who run the legal system. Even judges make mistakes. In fact Lord Hewart, the original 1924 source of the principle of open justice was a prime (and ironic) example:

Hewart … has been called the worst Chief Justice since Scroggs and Jeffries in the seventeenth century. I do not think that this is quite fair. When one considers the enormous improvement in judicial standards between the seventeenth and twentieth centuries, I should say that, comparatively speaking, he was the worst Chief Justice ever. (Lord Devlin, via Spigelman J)

ouch! Anyway, the point is that when someone from the justice industry screws up, as we all do at times, that is the very time we need open justice. And what do we get instead?

Name suppression for an ex-MP accused of fraud. Not a good look, but less stunning than…

A secret decision in the Tuhoe Terrorist Trial Why? There was wall-to-wall media coverage of the raids. Shouldn’t we at least know why a whole decision is secret?

And if you’re minded consider such questions, you might also like two more great quotes from Spigelman

Publicity is the authentic hallmark of judicial as distinct from administrative procedure (Privy Council)

Publicity is the very soul of justice. It is the keenest spur to exertion and the surest of all guards against improbity. It keeps the judge, while trying, under trial (Jeremy Bentham)

Good to see the Commerce Commission proposing refinement to its leniency policy for cartels this week in line with international innovation in this area. In case cartel leniency seems an odd concept, the idea is that the state promises not to prosecute you for involvement in a cartel IF you are the whistleblower. So cartel members eye up their mates, wondering if they’re about to dob everyone else in, and the result is often get a race to confess.

The details of the refinements will be interesting I’m sure, but in the meantime, it reminds me of a news item I gleaned during the mobile termination bunfight in Wellington this week.

As I understand it, the Germans have recently allowed for cartel victims to sue for damages. Fair enough you probably think, but one consequence is that it undermines the leniency programme. The state won’t prosecute the whistleblower, but the victims can.  It seems to me that they could easily have extended immunity for whistleblowers to the private action legislation. Must investigate further.

Based on this from Stephen Franks (via DPF) it sounds as though there is some momentum building for changes to the Bill of Rights Act (NZBORA).

I don’t know whether the Russell McVeagh guys Stephen quotes are connected with other NZBORA arguments being advanced by Business NZ (which I discussed below). But it is worth noting that changes to the NZBORA are extremely far-reaching, so lets all pay attention.

On Stephen’s more specific topic of regulating financial advisors, my view is that the massive asymmetries of information/knowledge in this market mean that some regulation is likely to be warranted. Any regulation will inevitably constrain the rights of some people. No regulation would be a disaster for everyone including the supply side. And while legislation should not assume everyone is an idiot, recent NZ financial history suggests there is scope for improvement.

The trick is to find a balance, which is also why potential changes to the NZBORA should be of wider public interest.