Unfair contracts law: an economist’s view

One of the concerns about the proposed unfair contracts law is whether it will prevent unilateral variation of interest rates by lenders (assuming it is a variable rate contract) and fees and charges.

Stephen King, Dean of the Faculty of Business and Economics at Monash University in Melbourne and a former Member of the Australian Competition and Consumer Commission (ACCC) argues here that there is no evidence that the suggested changes work or benefit consumers or the economy.

He says the most obvious exception to an unfair contracts law is:

…variable interest rates on home loans. Will allowing banks to unilaterally vary these interest rates be illegal, and if so what are the consequences? Will banks have to individually negotiate with borrowers when the RBA changes interest rates before these changes can flow through to borrowers? Will it spell the end of the variable rate mortgages favoured by the vast number of Australian home-buyers and force them onto fixed rate mortgages?

It may be argued that this is just ‘one exception’, but there are many situations where suppliers face input costs that vary over time.  Currently these may be passed onto consumers or absorbed by the seller.  Will the new laws force sellers to bear all the risk of input price changes if they use standard form contracts? If so, will consumers be happy to pay the price rise associated with the ‘insurance against price changes’ that the seller is forced to supply? It is far from clear that concentrating the economic risk of input price changes on to a few sellers rather than allowing it to be dispersed among many buyers is economically desirable or in the consumers’ interest.

Print Friendly, PDF & Email

Your Compliance Support Plan

We understand you need a cost-effective way to keep up to date with regulatory changes. Talk to us about our fixed price plans.