Wednesday, March 21, 2012

Caveat Emptor vs. "Consumer Protection"

So-called consumer protection laws are often incredibly unjust; putting every burden on producers and meting out heavy-handed punishment if anything happens to go wrong (by which I'm deliberating excluding conscious fraud). The effect is to drive some producers out of the market, to raise prices for everyone, and often to have no effect on overall fraud as those who wilfully engage in deceit aren't phased by a few more regulations.

This tragic case of an insurance broker losing everything for selling an annuity to an elderly woman is a case in point, and will certainly make it harder for the elderly to purchase annuities in the future. Notice also that much of the motivation comes from keeping businessmen in check, in this case there wasn't even a loss involved:
After months of delays and a failed dismissal motion, trial was set for Sept. 21. During the trial, two out-of-town defense witnesses were brought in early and testified out of turn during the prosecution’s portion. One was Dick Duff, noted author on annuities, who said an Allianz MasterDex 10 is complicated but has “many more benefits than there are negatives,” according to the Record-Bee. “Not everyone wants liquidity.”

The MasterDex 10 had a five-year deferral and 10-year payout. After the five years, the owner can annuitize and get a guaranteed monthly income for 10 years. During the period, the owner can take out 10 percent annually or 20 percent if the owner is in a nursing home. The owner starts with 87.5 percent of value, is credited 1.5 percent annually and would be able to “break even” after seven years if the owner surrendered the product.

Duff said that he himself receives money from annuities and would, in fact, be happy to buy Schuber’s annuity for at least $180,000—$5,000 more than she paid for it. Duff knows a good deal when he sees one because, at that moment, the annuity had $217,000 of annuitization value.

[...]

Other jurors said they should make an example of Neasham: “Some jurors made the statement that, in essence, meant we should send a message to insurance companies to be careful when selling annuities to 83-year-olds. The jurors also felt they should send a message to insurance agents that they should be careful who they sell to.”
My opinion is that most transactions should simply be governed by caveat emptor, with the government only intervening in cases of fraud (and courts being available to rule on breach of contract actions).

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