RegulationJun 22 2016

The maze, fog and void of access

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Every so often the Financial Conduct Authority (FCA) gives an in-depth insight into its musings on pertinent issues affecting the financial services industry in the form of occasional papers.

The latest instalment aims to get industry players’ creative juices flowing to allay the plight of potentially millions of UK consumers who are unable to access financial services that would help them meet their needs – which would, in turn, improve market integrity, drive competition and promote financial stability and economic growth.

In its 158-page dossier, the regulator explored access issues through the lens of five major social and technological trends: digital transformation; compliance and crime prevention; automated processes in the credit market; increasingly segmented markets for insurance; and the effect of policies designed to tackle problems associated with an ageing population on access to credit in later life.

Many of these concerns are condensed into three over-riding issues that hinder consumers’ access to financial advice.

The first, dubbed ‘the maze’, is centred on the complex and bureaucratic processes which are ultimately to the detriment of consumers. Citing its recent research on the topic, the FCA said that poor and inconsistent communication can leave customers “in the dark” about what steps they can take to tackle obstacles to receiving financial advice.

It added: “Evidence shows that a significant barrier for some groups is the way banks implement their obligations to ‘know your customer’ to prevent crime, screen for fraud or check creditworthiness.

“These practices can exclude individuals who are not able to produce standard forms of identification (but do have other valid forms of identification) and inhibit the activities of some alternative payment services that unbanked people might otherwise use.”

The second –‘the fog’– delved into how financial products are communicated and marketed to the public. The research found that John and Jane Doe are unable to decipher industry jargon, resulting in confusion, while products can be difficult to compare as they use different terminology and concepts to describe features.

Ian McKenzie, client director at London-based EQ Wealth, agreed, adding: “Some of the terms used by providers about their own pension products for example, are simply illogical. Pensions are complicated enough as they are and are increasingly so because the government cannot stop fiddling with them.”

The ‘void’, the third issue highlighted, explored the physical and digital barriers to financial advice. The report said a wider migration to a digital platform means consumers who are not internet savvy are left behind.

What is more, those with disabilities can experience difficulty in accessing banking services that increasingly rely on technology or automated systems, while customers living in rural areas may struggle with the cost and time pressures if having to visit bank branches.

To make matters worse, the number of branches is on the wane. In 1988 there were 20,583 in the UK, but by the end of 2015 there were reported to be only 8,400.

In 1988 there were 20,583 branches in the UK, but by the end of 2015 there were reported to be only 8,400 branches.

The watchdog said financial services firms should strive to make their services accessible to consumers but acknowledges that achieving a reasonable balance between access, business objectives and regulatory requirements is not always straightforward.

It added that firms are likely to be reluctant to do this without regulatory or government involvement, because those that take proactive steps to widen access, while their rivals do not, may find it difficult to justify the move over the longer term if it potentially puts them at a competitive disadvantage or if the business is not viable.

However, the FCA warned that a move to expand access channels implieed a degree of cross-subsidy from other customers.

It said: “On the one hand, cross-subsidies have drawn the attention of competition authorities because they can reduce transparency and can lead to firms using predatory pricing to deter competitors entering the market.

“On the other hand, cross-subsidy can allow firms to provide services that may not be available otherwise”

Buried deep within the report under the ‘ageing population’ banner, was a more contentious view – previously expressed by the Council of Mortgage Lenders (CML) – that mortgage advisers may need to have more holistic expertise in future to help older people – because mortgage advice alone may be inadequate for decisions about mortgage borrowing into retirement.

However, the prospect of mortgage advisers expanding their advice remit could lead to intermediaries becoming jacks of all trades and masters of none, according to Christopher Taylor, director and mortgage consultant at The London Mortgage Brokers.

He said: “I find that when dealing with clients who are seeking mortgage advice, they also have needs in other advice areas. Inheritance tax planning is a good example of this. I have a basic understanding of the topic, but I would refer the business to another adviser who specialises in the area.

It also notes CML’s suggestion that the remit of the government’s free and impartial retirement guidance service, Pension Wise, could be extended to give more holistic information and support across-retirement issues.

The report goes on to highlight struggles experienced by those well into the twilight years of their interest-only mortgage contract before the loan matures.

Quoting research it carried out in 2013, the FCA estimated that 2.6m interest-only mortgages will become due for repayment over the 30 years to 2043. In 10 per cent of these, the borrower has no plan for paying off the capital, but is often “overly” optimistic about their ability to pay off the capital in full.

The regulator noted that Citizens Advice’s 2015 projection puts the figure higher, estimating that, out of a total of 3.3m with interest-only mortgages, 934,000 have no plan to pay them off and so risk having their homes repossessed.

Switching to a repayment mortgage, extending the term and making overpayments are among the possible remedies outlined in the report for capital-starved, interest-only mortgage holders.

The pick of the bunch, however, is the conversion of interest-only mortgages into a lifetime mortgage with interest rolling up – which would be repaid along with the capital when the borrower dies or goes into long-term care.

Peter Williams, executive director of the Intermediary Mortgage Lenders Association, said: “There is not a single solution for lending into retirement. Mortgage advisers need to take into account how the needs of their clients might change over the course of time and consider migrating them from an interest-only mortgage to a repayment mortgage.

“We can’t have mortgage advisers who have the skills to advise on one aspect of a new product innovation but are not able to advise on the lifetime mortgage part because they do not have the qualifications to do so. The adviser needs to have the skills and FCA permission.”

The report stated: “The industry sees barriers to this type of innovation, particularly because the FCA currently has different conduct of business rules for traditional mortgages and lifetime mortgages.

“This impediment is reinforced by the Mortgage Credit Directive which applies only to traditional mortgages and very few lifetime mortgages.”

Myron Jobson is features writer at Financial Adviser

Key Points

The FCA has published a paper on the problems of access to financial advice.

A big problem has been the closure of bank branches.

One looming issue is the lack of payment vehicles for interest-only mortgages.