Hey ho!

This morning, my wife turned on the BBC Breakfast programme to learn of the latest harbinger of doom for mortgage intermediaries:  the Interest-Only Mortgage Misselling Scandal.  The FCA has published the results of its latest thematic review, from which we learn a few things which are, mostly, of no surprise to anyone.

You can read the FCA's announcement, as it was reported today, by clicking here.  And already, you can see the way in which the media is inclined to deal with the topic, by viewing today's article in the FT.

Hey Ho, indeed.  Kipper Williams' cartoon is not far off the money in representing the see-saw, reactionary nature of today's redress culture, when it pertains to any financial product.  My wife, who is no financial whizz-kid, commented that if she had taken on something called an 'Interest Only Mortgage', the idea that the capital might not necessarily get repaid would have featured very prominently in her thinking.  It kind of says what it does on the tin.  Unfortunately, this will not be sufficient for the regulators: the important thing will be how the customer understood what it said on the tin, perhaps what colour the letters were written in, or the extent to which the sun shone on the day the tin was looked at.  And all of that would be the adviser's responsibility.

Notwithstanding, there were always risks associated with these products, most of which were not exactly difficult to predict:
  • The heightened risk of negative equity - if there is no repayment vehicle in place to offset the deleterious impact of a slump in property prices;
  • The folly of depending upon the unpredictable whims of fate as the basis for repaying the debt, and therefore actually owning your own home - such as remaining in Great Aunt Maud's good books long enough for that to feed through to a nice, juicy legacy;
  • The extent to which any repayment vehicle (ISA, endowment, pension) might actually deliver disappointing returns;
  • The natural propensity of consumers to forget why they had a particular repayment vehicle in place, and spend the proceeds on a world cruise, or a nice, shiny plasma TV.
However, from a pure intermediation perspective, the real danger of Interest-Only Mortgages should have been as clear as day to the adviser:  the tunnel-vision that is associated with the preoccupation with buying your new home means that most people blot out of their minds virtually any consideration other than their immediate focus.  In practice, the financial intermediary can document his or her advice with the kind of obsessive meticulousness that would ordinarily be the natural precursor to therapy, and it will not matter one whit to the putative house-purchaser.  Risk warnings regarding the non-repayment of capital may be sprinkled around like confetti, highlighted in lurid pink, or inscribed in foot-high letters, and the client will somehow continue in an oblivious state towards completion, on the basis of his unnaturally inexpensive mortgage.

House-purchase transactions are the ultimate example of short-termism, where the immediate goal (access to my dream home) is sufficiently powerful and graphic to eclipse all other significant considerations, such as risk, capital security, family protection etc.  There is a peculiar kind of fecklessness evident in the modern consumer which can only be controlled by some kind of forcible restraint, and perhaps medication - neither of which practices are likely to be endorsed by the FCA.
Update for ValidPath Members
We have, this week, updated our resources for mortgage advice in our QuickStart Advice section.  There's a new version of the Suitability Report plus an updated HomeBuyer's Information Pack.

Kevin Moss, 02/05/2013