Sub-prime/ lifetime mortgage customers confused by advice and info-FSA

Sub-prime and lifetime mortgage consumers are unable to make a distinction between receiving advice or information-only, according to findings published by the FSA today in the second stage of its Mortgage Effectiveness Review .

The regulator found the Initial Disclosure Document (IDD) is not prompting consumers to think about the level of service they might receive.

It says consumers did not consider the purchasing process in the terms of advice and information-only. Instead, lifetime consumers saw the distinction as being between buying directly from the lender or buying through a broker.

"There is some evidence that some (sub-prime) consumers were motivated by the stated fee level to consider other options.

However, the IDD was not otherwise used to further their understanding of the types of service available; consumers did not recognise that it could be used to compare services between firms.

"Moreover they felt that it was for them to make the final purchasing decision, regardless of the type of service received," the report says.

It also reveals while both sub-prime and lifetime consumers see the Key Facts Illustration (KFI) as an important and useful document for helping them to check points of detail and clarify uncertainties, this was not the case for product comparison and shopping around.

The research concluded sub-prime consumers rely to a considerable extent on their broker and accept their broker’s recommendation and most lifetime consumers also rely on their broker.

Both sets of consumers focus heavily on price, with sub-prime consumers concentrating particularly on initial payments, the FSA says.

Research was also carried out into consumer experiences of arrears handling and this indicated areas of non-compliance by firms with the arrears rules. The FSA is undertaking focused thematic work on the arrears management practices of firms to establish whether such problems are indeed occurring. The results of this work are expected in June.

Dan Waters, director of Retail Policy and Themes at the FSA, says: “The Mortgage Effectiveness Review is an integral part of the FSA’s programme of work on mortgages, and will help shape the future of our mortgage conduct of business regime.

"It sits alongside our thematic work and close supervision of individual firms, and forms part of the balanced and proportionate approach we are taking to ensure the fair treatment of consumers.”

The Effectiveness Review was designed to measure whether the FSA’s mortgage conduct of business rules are delivering the intended benefits for consumers. The first stage of the review, published in 2006, looked at disclosure and advice and selling practices in the mainstream mortgage market and found that the current system was generally working well for consumers.

This second stage focused on the more specialised sectors of sub-prime and lifetime mortgages. While these sectors are modest in size, together accounting for less than 10% of the regulated mortgage market, they were looked at in detail because the risk of consumer detriment may be greater, the FSA says.

The findings of the review will help to inform the wider review of the mortgage regime, announced in the FSA's Business Plan 2008/09. This will consider moving towards greater reliance on principles and other high-level rules, and will reflect issues identified through past and ongoing thematic work that might point to changes in policy.