There is one message that everyone within the mortgage industry – whether they be lender, packager, broker or regulator – can agree with; when it comes to making financial choices, always speak to an independent financial adviser (IFA). This may seem trite but while a consumer can know they need a mortgage, most people will admit they have little idea about how to get one, let alone the right product for their specific needs.
John Webster, CEO of Swift, remarks: “20 years ago, the majority of people had an endowment mortgage but if you asked them at the time how it worked, many, if not most, wouldn’t have known.”
This problem doesn’t just affect endowment mortgages but extends right across the financial services sector. As Brits, we are often taught it is bad manners to discuss money but as more people get access to credit facilities, whether through credit cards, mortgages or personal loans, knowing what you are doing is becoming more crucial than ever before.
Neil Johnson, head of PR and policy at the Building Societies Association (BSA), comments: “One of the problems is that things have changed over the last 15-20 years. The finance sector is a lot different and more people have far higher levels of disposable income. The financial sector has changed to meet these needs but the average person is not keeping up.”
Halting the debt pattern
With unsecured consumer borrowing now pushing above the £1.2trillion mark, many are starting to call for ways to halt this pattern of spend today and worry tomorrow. Along with tighter controls on lending practices, greater help for consumers is also one topic which has been widely debated. GCSEs in personal finance have been mentioned as a way of teaching young people how to maintain control over their finances and the ifs School of Finance has been running programmes aimed at educating the general public in better financial planning skills.
A spokesperson for the ifs School of Finance highlights: “There is no doubt that mismanagement of personal finances contributes to rising debt, poverty and social exclusion. As a result, we should better educate future generations in personal financial issues.”
However, with business leaders demanding more be done to equip young people with the skills to help them compete with international rivals, primarily with foreign languages, celebrity chefs focusing on the importance of healthy eating, and sports personalities warning of the perils of school children not getting enough exercise, teachers are already arguing there is enough to fit into the school week without adding financial coaching – a point acknowledged by ifs School of Finance. There is also the problem that while engraining financial skills in today’s youngsters is important, there are already millions of adults wracking up horrendous debts and placing themselves in potential fiscal peril.
Thomas Reeh, chief executive of blackandwhite.co.uk, points to the fact that a lack of understanding is breeding a ‘fear factor’ around financial services.
“Mortgages scare the hell out of people. We deal with C and D category clients who are truly frightened of mortgages. When they see the process and the paperwork in front of them, they get scared.”
This fear means many will look for guidance and this is an excellent business opportunity for brokers. Many now see themselves rather as financial coaches to their clients as even those who have a basic understanding of the financial sector need help when choosing which product is right for them.
As Jason Richardson, director of YooToo Financial Services observes: “Education is a good thing as it is a lot easier to deal with people who have an understanding of financial services. Getting a qualification won’t solve many of the problems people get themselves into, as their spending nature won’t change if they have a GCSE in personal finance. But helping consumers understand what they are dealing with can only be a good thing.”
One piece of the puzzle
However, this is but one piece of the puzzle. For you know when you look at a problem and are unable to figure out a solution, only to find the crux of the conundrum is actually your fault, many within the industry have come to the conclusion they are partly to blame for this dearth of knowledge.
For many, financial services has lost its common touch due to the advent of regulation – an evolution incepted to do the complete opposite in an ironic fiscal juxtaposition.
As Reeh explains: “As an industry, we still have a long way to go. One of the down sides of regulation is that more paperwork is being forced in front of the customer. The sheer volume of stuff is unbelievable and if you wanted to treat customers fairly then you would give them an A4 sheet. Also, when it comes to a mortgage offer, it is written in the language of the Financial Times when most people read The Sun and The Mirror.”
Webster agrees: “There is so much legislation nowadays to help people, but I don’t know how it has improved understanding. People get so much they can't apply themselves to it.”
However, Reeh also points out the insurance industry recently suffered from a similar problem and a court case was brought which found the process was unreasonable for the client to comprehend. He predicts a parallel fate could beset the mortgage market.
Improving understanding
Robin Gordon-Walker, spokesperson for the Financial Services Authority (FSA), argues: “We did a lot of consumer research before regulation and on the basis of that research, we introduced the Key Facts Illustration (KFI) to show the consumer information about the policy. The information is important for consumers to decide which product is right for them.
“We recently published the first phase of our regulation review, which showed consumers were using things like Initial Disclosure Documents (IDDs) to shop around, which has brought considerable benefits to consumers.”
Despite this, regulation has brought many advances to the market and Richardson highlights it has helped to leave behind the image of the ‘dodgy’ broker. So what can be done to improve understanding among ordinary people of what they need to do to keep their heads above the financial waterline?
Again, it comes down to image, as Johnson explains: “The image of financial services is part of the reason for a lack of awareness. If you don’t know what you are doing then you can’t change the situation you are in, so you end up watching Eastenders instead of spending those 30 minutes properly managing your finances.”
