Dise˜ no API

In summary, legislation now provides for simplified and standardised

information to be made available at earlier stages in the mortgage selection process.

These changes come in response to longstanding concerns that the information

available to borrowers at the time of shopping was ineffective both in helping

borrowers compare the offers available to them and in promoting understanding of

the key features of a loan. Through KFS, information is now available in a

prescribed format in an attempt to ensure that all licensed home loan lenders provide

key loan pricing information that is transparent and is set out in understandable,

consistent language and formatting. By providing clear, consistent information to       

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home loan borrowers the government aims to increase borrowers’ access to key

pricing information for home loan products.

While the use of prescribed disclosure superficially deviates from the

traditional common-law approach of freedom of contract, the legislation is grounded

in long-standing concerns around market failure and the need for consumer

protection. These concerns arise from the inequality of bargaining power between

suppliers and individuals. It is not uncommon for standard form contracts to give rise

to information asymmetry problems due to variables such as length of

documentation, density of legal content and potential complexity of language.

Through the KFS legislation the government endeavours to empower borrowers to

overcome these issues by promoting a better understanding of loan contracts and

enhancing competition among lenders.

Overall, testing of disclosure using similar principles, both in theory and in the

context of the UK home loan market, has shown that the design of the KFS (or its

equivalent) is likely to enhance borrowers’ ability to compare loan information.

Research from the telecommunications industry supports findings around the use of

prescribed documents as a means of providing consumers with the data needed for

meaningful disclosure in decision-making (Australian Communications and Media

Authority, 2014, p.90). This same research, however, highlights the importance of

clear, concise information and formatting which draws attention to key variables and

uses minimal text. O’Shea used these same design principles when designing the

recommended disclosure model presented to the Standing Committee of Officials of

Consumer Affairs, and found that the recommended disclosure model substantially

59, 91). The clear, single-page design of the KFS, which uses tabular formatting to

separate out the key costs of the loan and uses minimal text, greatly improves users’

comprehension of the key costs of the home loan and empowers them to compare

loans more accurately and more easily.

Put another way, provided the KFS has been designed correctly around

relevant essential data disclosure and is structured correctly for easy comprehension,

Australian home loan borrowers should be far better placed to make ‘correct’

decisions within this complex market. In doing so, both their own interests and the

broader macro-economic interests of the country as a whole should be more easily

advanced. These premises will be tested in several sections of this thesis and, with

the passage of time since the legislations inception in 2012, the uptake and impact of

KFS should become more apparent in market trends in consumer decision-making.

The reforms outlined above – and their resultant statutes and regulations –

remain, however, tied to the efficacy of the philosophical framework from which

they arise. That is, regulators emphasise blanket disclosure as the appropriate method

of legislating for consumer protection, both in relation to KFS and more generally in

laws passed over the last five decades, based on the assumption that consumers who

are given sufficient information will make informed and rational financial choices.

Accordingly, under rational consumer orthodoxy around the impact of disclosure on

borrower decision-making, success of such disclosure presupposes that consumers

are rational to the extent that if given the necessary data they will self-educate for

their own benefit in relation to decision-making; that is, that people are perfect

rational maximisers of their personal utility (Atiyah, 1979; Savage, 1954; A. Smith,

means that when home buyers are deciding on a home loan, they will seek out and

compare all relevant information available to them, weigh up these alternatives, and

select the product that most benefits them (Payne, Bettman, & Johnson, 1993).

A major limitation of the disclosure approach, however, is that no amount of

information, regardless of its effectiveness, can improve the decision of borrowers

who do not use it, or do not base their decision on the information it contains. Even

where price is important, and a decision-maker reads the disclosures, disclosure

cannot force ‘economic rationality’ into a decision-maker (Rohner, 1996).

Ultimately, this means that KFS may only stand to benefit a very particular subset of

borrowers. Unless a borrower compares homes loans, and more specifically

compares home loans on price, and attempts to educate themselves through the use

of disclosure, KFS are unlikely to enhance their decision.

As noted throughout this chapter, it is possible that KFS may not only facilitate

more effective loan price evaluations but may also, through lower opportunity cost in

gaining this information, entice more borrowers to participate in the exercise of

comparing loan prices. Behavioural biases will be discussed further in sections 3.1.3

to 3.1.5. However, if behavioural biases remain unaddressed, as will be examined in

more detail below (see chapters 5 and 6) and discussed in the conclusions, then

despite parliamentary intent the impact of these recent changes may actually be

limited.

Overall, while research such as O'Shea (2010) shows that KFS may improve

borrower decision-making in theory, stakeholders such as the consumer advocacy

agency Choice have raised several concerns about whether these benefits will exist

determining whether the KFS attains the objective of improving home loan decision-

making in the Australian home loan market. In particular, the research considers the

effectiveness of the disclosure process and whether the regulatory approach

optimises the intended outcomes.

The next chapter considers the literature pertaining to decision-making in the

context of home loans, drawing from research which examines complex decision-