A behavioural finance professor has criticised the Money Advice Service’s advice for interest-only customers as encouraging procrastination not action.
In a paper published by the Council of Mortgage Lenders in its News & Views section, Professor Daniel Read of Warwick Business School and his PhD student Ali Osseiran list seven rules to effectively communicate with interest-only customers.
In May this year the FCA published the findings of its thematic review into interest-only mortgages, finding just 13 per cent of borrowers said they did not know they needed a repayment plan when they took out their loan. Then in August it listed guidance to lenders and third-party administrators about how to treat interest-only customers who risk being unable to repay their loan.
The FCA urged banks and building societies to contact interest-only customers and confirm that they have clearly understood the terms of their mortgage and that they have a suitable repayment plan in place.
But the academics say a pamphlet put together by the MAS to assist interest-only borrowers called ’Take action with your interest-only mortgage now’, is an example of how not to communicate with borrowers.
Read and Osseiran’s first three rules to communicating effectively with these customers are to keep the wording simple, get “right to the point” and for lenders to ask exactly what they want. In particular the academics advise lenders against providing an extensive menu of options. They say behavioural scientists have found that too many options can lead to confusion, procrastination, ”feelings of uncertainty and regret, and even withdrawal from the choice situation”.
Read and Osseiran say all three of their rules are violated in the MAS pamphlet.
The academics say: “The pamphlet provides those who do not have a plan in place with five steps to take, and those who do have a plan with (surprisingly) six steps.
“In fact, the steps are not steps at all but a list of actions that can be taken in any order and in any quantity. They do not even appear to be in order of priority. Moreover, the steps all appear to be non-trivial projects, each containing many steps and are very likely to lead to a high level of procrastination.”