The intellectual challenge of regulating mortgage offers that give consumers an upfront gain for a long-term loss were discussed on Friday (4 November) by Peter Andrews, chief economist at the FCA.
Speaking at the Conference on Consumer Choice in Mortgage Markets at Imperial College Business School, Mr Andrews previewed some of his initial thoughts about the regulator's forthcoming Mortgage Market Study.
Mr Andrews said that while consumers in the UK mortgage market have not experienced systematic mis-selling of the kind that has blighted investment and insurance markets, selecting a home loan is the biggest financial transaction many people will make.
"As a result, even seemingly small differences in the price of mortgages chosen by consumers can have material impacts on household budgets," he said.
He described how hyperbolic discounting, effectively choosing a small reward today over a larger one tomorrow, can lead to a consumer accepting initial mortgage savings that are more than offset by later high charges.
Mr Andrews said this could justify consumer protection measures but it could also be argued that the information was clear and the consumer was not misled.
"This looks like a market failure that provides a case for intervention under the standard notion of regulatory economics.
"On the other hand, it could be that de-biasing was practically impossible."
Another problem identified by the regulator was judging whether mortgages that were initially cheap and expensive later on did not align with consumers true preferences.
Additionally, he said he wondered if regulation were enacted whether it would end up being effective against consumer biases.
"There are difficult practical questions about whether there is harm and, if there is harm, about whether and how it can be remedied."
The FCA's study will need to understand how consumers make choices and then use this understanding to work out how to change what consumers decide, said Mr Andrews.
He concluded the FCA study could lead to moves to influence consumers’ decision-making processes or to constrain the choices available, such as through product regulation.
