Posted on 19 December 2010 by
In an interview in The Sunday Telegraph today Lloyds Banking Group's current Chief Executive, Eric Daniels, promised to bring greater transparency to his bank's financial products in the last 3 months of his tenure.
He appears to be planning to start with current accounts, but as the largest mortgage provider in the UK he has a particular responsibility to make sure his mortgage adverts are "transparent," which they already should be to meet the FSA's requirement that all promotional material must be "clear, fair and not misleading."
In my view adverts from Halifax, Lloyds TSB and Cheltenham & Gloucester promoting their 2 year fixed rate or tracker mortgages with a low interest rate but a high percentage fee, typically 2.5%, fail this test miserably because the headline focuses on the great interest rate but makes no mention of the arrangement fee. The size of the fee is usually stated in smaller type in the bullet points included in the advert. These are designed to highlight some features of the mortgage. However, a big fee is hardly a feature, more an integral part of the pricing, which is why it should be shown next to the interest rate and in the same size type.
There is nothing wrong in a mortgage with a low interest rate subsidised by a big fee - indeed it will suit some people - but what is wrong is promoting the low interest rate without giving equal prominence in the same size type to the large fee. Working out the effective interest rate on a mortgage with a percentage fee is actually easier than for a mortgage with a flat rate fee because the former will have the same effective rate whatever the loan size.
This calculation will be straightforward for a mortgage broker but many people struggle with percentages and it is easy to see why borrowers who don't get advice ignore the impact of fees on the real cost of their mortgage. It is also easy for branch based bank advisers who are struggling to compete with more competitive mortgages available elsewhere to talk about the low interest on a mortgage but not focus adequately on the high fee.
There are therefore very strong grounds for Eric Daniels to impose his transparency agenda on this aspect of his mortgage advertising for this type of mortgage. But since it is impossible to properly evaluate a mortgage without knowing, among other things, the fee as well as the interest rate, why not go a stage further and show the fee in the same type as the interest rate in all mortgage adverts. After all, if the mortgages with big fees are going to have the fees highlighted it would be illogical not to also highlight the fee when it is lower, or even nil.
Showing the fee in the same size type as the interest rate is not rocket science and bearing in mind some lenders have copied Lloyds Banking Group's criteria restrictions on interest only mortgages maybe they would copy this as well. However, Eric Daniels made the point that even if other banks didn't follow his lead in providing greater transparency it would not impact on his strategy to do so.
I don't understand why the FSA doesn't consider this level of transparency is necessary to meet it's very sensible "clear, fair and not misleading" requirement. However, as it appears not to this is one area where Lloyds could adopt Eric Daniel's new policy and just maybe set a helpful regulatory trend for much of the mortgage market. Maybe the FSA will even begin to promote it as best practice even if it doesn't actually make it mandatory!
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