"Clear, Fair and Not Misleading." Really!

Posted on 11 September 2014 by Ray Boulger

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"Clear, Fair and Not Misleading." Really!

"HSBC is currently advertising its “Incredibly low” 2 year (to 30/11/16) fixed rate at 1.49%. Pity about the fee!

The advert naturally highlights the 1.49% fixed rate, which is in red, as is the revert to rate and the APR.

In much smaller type below, in fact in type only 20% the size used to quote the interest rate, and in much less prominent black, is stated the fee, which is £1,999.

The fee is not of course actually hidden but the only typeface used in the advert smaller than the fee is the single line of legals at the bottom.

For many consumers who want a 2 year fix, and can meet HSBC’s criteria, this mortgage is actually excellent value. In fact, despite the very high fee, because of its exceptionally low interest rate it is market leading for loans above £150,000.

However, I fail to see how a financial promotion can be considered “clear, fair and not misleading” when a large fee used to subsidize the rate can be displayed in a combination of a comparatively small typeface and a less prominent colour.

There is nothing wrong with trading off a lower fee for a higher rate and indeed for those with a larger mortgage such an arrangement will often offer the best value. However, consumers need to understand that is what they are doing and a lender who wished to be transparent would not impede such calculations by giving totally inadequate prominence to such a material factor as the fee.

Although this is not the only financial promotion I have seen which appears, for the same reason, to flout the requirement to be “clear, fair and not misleading,” it is a particularly blatant abuse.

If the FCA considers this financial promotion passes its “clear, fair and not misleading” test it could use this advert (after of course blanking the lender’s name) to do some research to ascertain whether its views are in line with consumers.

However, to bring clarity to this situation and avoid some lenders taking the mickey in this way I think there is a simple solution. The FCA could require all lenders to include a summary box in all financial promotions which mention a specific interest rate. This summary box would have to include a few specified basic details of the mortgage in the same size (and no less prominent colour) as the actual interest rate. Lenders obviously could include in the advert outside the box any other details they wanted to promote.

I suggest the additional mandated information in the summary box should be:

  • End date, making it clear whether it is a set date or a set period, which many adverts currently don’t.
  • Fee, and whether required on application or completion, or part and part.
  • Maximum LTV.
  • Details of the ERC.
  • Whether or not a free valuation is included
  • Details of any other freebies, such as free legal fees or a cashback.

It should not be onerous to include this such limited, but important, additional information.

At present mortgage financial promotions have to include the largely meaningless APR (and from March 2016 the EU has decided that many financial promotions will have to deliberately confuse consumers by requiring them to include 2 very different APRs). HSBC’s advert provides a simple example of how pointless the APR is.

HSBC’s revert to rate is 3.94%, which enables it to quote an APR of 3.7%. However, the APR would probably be the same even if the fee was zero and so the high fee has a nil or negligible effect on the APR because it is amortized over a very long term. On a 2 year fix even the fixed rate has only a small impact on the APR - the only really important influence is the current revert to rate, because the  APR calculation has to assume that rate will apply for the whole term of the mortgage after the fixed rate, which on a 2 year fixed rate obviously means nearly all of the term.

As long as the regulator requires financial promotions to prominently display a largely meaningless figure like the APR it could at least help consumers by also requiring adverts to include a summary box, as outlined above, which would actually give consumers some useful information in a concise and easily understood format!

Categories: Mortgages, Regulation

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