I’m not talking about the technical implications of such a shift, like training costs, increased salaries or changing sales processes.
I’m talking about the fundamental requirement for consumers to have to receive advice in pretty much every case, whether they want it or not, and the potential impact this has on the balance of responsibility and ownership of decisions.
The move to a fully advised market raises a potential moral hazard.
There is a risk that consumers become less engaged if they are provided with advice they don’t want or need.
Will it cause them to pay less attention to the advice they’re given and engage less in the whole mortgage process?
The rationale for this proposal is that the Financial Services Authority believes many borrowers who have gone through a non-advised sales process in recent years mistakenly believe they have received advice.
It therefore deems that a move to a fully advised mortgage market is warranted to prevent this confusion in the future.
The simple initial advice disclosure under The Mortgage Code was easily understood by consumers
That’s fine but the real dilemma facing the FSA should be whether this confusion is best addressed by requiring all borrowers to receive advice or whether there could be better communication of the different types of sales, enabling the consumer to choose which one they want.
Confusion does not automatically lead to consumer detriment. And it can be prevented through simpler rules around disclosure.
It is questionable whether making the move to a fully advised scenario, thus removing an element of choice from consumers, is what is needed for the market to function better.
Prior to FSA regulation of the mortgage market there was an established voluntary code of practice for mortgage lenders – The Mortgage Code.
Under that regime, prospective borrowers were provided with the option of three types of service:
- Advice and a recommendation on which mortgage is most suitable for them.
- Information on the different types of mortgage products offered so consumers can make an informed choice of which to take.
- Information on a single mortgage product only, if only one product is offered by the provider, or if the consumer has already made up their mind.
These different levels of service were provided at the beginning of the mortgage interview so it was clear to borrowers whether they were receiving advice or not.
It seems that this simple initial disclosure was easily understood by the industry and consumers, and I see no reason why a similar approach cannot be replicated.
In fact, the MMR should aim to raise the level of financial capability by empowering borrowers to take ownership of their personal finances and enable them to make informed decisions.
Surely providing clarity about the different sales options available will address any consumer confusion and enable borrowers to choose the most appropriate process for their needs.