Confusion reigns

Credit card companies have long been accused of designing and marketing their products and services in ways that customers find too complex to fully understand.

There is now a term for this ‘ confusion marketing ‘ where providers are thought to deliberately cloud the issue in order to disguise their offering. But could this charge also be levied at the mortgage industry?

Although a mortgage is, by necessity, a complex product it should not be impenetrable to understand for those taking them out, and the good news is advisers and product providers seem to be trying to make things easier for the customer to understand.

So what is confusion marketing? The term has spawned from the growth of an increasingly competitive financial services industry. It is the deliberate attempt by a provider to design and promote their offering in such a way that the consumer simply cannot work out the true cost, or value of the product or service on offer.

The practice of confusion marketing is something most commonly charged at the credit card industry. There are different interest rates for balance transfers, purchases and cash withdrawals, and a labyrinth of special offers and discounted periods. It has been claimed it is nigh on impossible for consumers to find the best deal.

To illustrate how bad the situation has become, a Cambridge mathematician from the Isaac Newton Institute researched the marketing material issued by various credit card companies and concluded it was impossible to fathom out the exact rates and charges from the small print they publish. If credit card providers have deliberately set out their stall to lay a smokescreen across the true cost of their products, it would appear they have done a good job.

Why would an organisation want to practise confusion marketing? According to the theory, confusion marketing is driven by two of the biggest challenges for any company ‘ customer retention and profitability.

Fact or fiction?

Complex product features can make it daunting for customers to know whether to move, and difficult to know if they already have the best deal anyway. It has also been claimed providers make their products so complex it is not clear what the real cost to the consumer is and how this is charged via repayments and fees.

Again the question has to be asked as to whether this is a deliberate ploy by product providers or simply a consequence of a complex market? Which company in its right mind would set out its marketing strategy with the objective of deliberately confusing its target audience? This flies in the face of every marketing textbook ever written.

So how does this theory fit into the mortgage market? According to the Council of Mortgage Lenders (CML), there are up to 5,000 mortgage products available in the UK today. Given the sheer volume of mortgages consumers can choose from, it would be easy to conclude that we are following the lead of the credit card industry ‘ and that is before we even start to consider the complexity of the products available. But have mortgage providers been practising confusion marketing, or is ours simply a complex industry by nature?

Further investigation would suggest the latter rings true, with a key point of note being the majority of mortgages are sold via advisers, and so the products can be explained face-to-face to the customer. This highlights the main difference between credit cards and mortgages. Credit cards are predominantly sold direct to the public from providers, whereas up to 60% of mortgages are sold via intermediaries. This is hardly surprising when we view the mortgage products on offer.

Endless choice

Consumers are faced with a massive choice of mortgages including fixed rate, variable rate, discounted, flexible and capped. There is also a significant amount of jargon that accompanies these complex products ‘ redemption penalties, arrangement fees, early repayment periods, higher loan fees, standard variable rate (SVR), annual payment rate (APR) and loan to value (LTV). The list goes on.

Most lender websites include some form of ‘jargon buster’ but why should consumers learn all of this terminology when they can walk down the high street into the office of an adviser who is already an expert?

Indeed, how can the mortgage industry realistically expect consumers to be able to choose the best mortgage for themselves by themselves when, as an industry, we find ourselves in debate around best advice and the need for professional adviser qualifications?

Mortgage lending is the biggest single area of consumer borrowing, accounting for 81% of total UK lending, so it is hardly surprising to find that this a highly competitive and complex market.

Any suggestion of confusion marketing in relation to mortgages has its roots in the complexity and competitiveness of the market. Who is responsible for this level of complexity? It is the product providers and the industry regulators.

First, consider the role of product providers. The customer demands a good deal and a choice of products, but mortgages are a massive financial commitment and it is a complex and often lengthy decision to make.

The Financial Services Authority’s (FSA) own research (table 8.1 in CP146) concludes that customers do not use information sources such as adverts and leaflets to narrow down their choice of mortgage. Instead, they rely on discussions with lenders or intermediaries. As the person who has face-to-face contact with the customer, and provides advice, the intermediary could be accused of profiting from the complexity of mortgages.

In reality, however, by providing this advice they are simply meeting the needs of their customers. Ultimately it is the product providers who are the driving force of complexity in the mortgage market, as they design and market the products. Perhaps we have reached a point where some providers are adding features to products simply to help them with their promotional activity, but these features offer little (if any) benefit to the borrower.

Now let us consider the role of the regulators. If an accusation of confusion marketing can be levelled at any one aspect of the mortgage industry, then surely APRs are guilty as charged. Does anyone really understand or use them?

The FSA’s research found: ‘The information conveyed by the APR is not understood by consumers,’ and ‘consumers have difficulty distinguishing between the APR and other rates of charge.’

Surely we should be looking for an alternative such as a scenario based approach using actual examples of interest paid in certain situations. Just because people have got used to the term ‘APR’ does not mean it is the correct or most appropriate way to compare mortgage products.

Changing times

The fact that the average length of time a mortgage is held for is constantly reducing makes APR increasingly inappropriate for this purpose as it incorporates the cost over the complete term of a loan. People simply do not keep their mortgage for 25 years anymore.

There is a clear opportunity for the industry to utilise and raise the profile of alternative methods of comparison such as typical examples and comparative repayment calculations, and to convince the FSA to take an alternate route. Intermediaries can play a key role in this and are encouraged to contribute to the industry’s response to CP146.

Mortgages will always be complex. What we are experiencing today is the result of a maturing market. It is a long time since the days when friendly societies were the only places to go to get finance on a property, and ‘vanilla’ mortgages were the only ones available. Times have changed.

In any industry, maturity brings with it an element of uniformity, particularly on pricing in terms of what is on offer from competing companies. Competitive advantage is sought from non-price features. Innovative developments such as current account mortgages have been made possible not only by technological developments but also by the need to differentiate in an increasingly uniform prime mortgage market.

The non-conforming market is also reaching a stage of maturity and the recent launch of a current account mortgage in the sub-prime sector by Britannic Money is the latest sign of an increasing focus on non-price competition.

Product innovation

There will be more to come from the non-conforming sector and sub-prime in particular as the market begins to crowd with mainstream lenders and other new entrants, spawned from the growth of correspondent and branded lending initiatives.

So are we dazed and confused? It is certainly an interesting debate, but it would be harsh to accuse the UK mortgage industry of profiting from confusion marketing. A more accurate description is to say it has grown and developed logically as well as responsibly to meet the needs of consumers in a complex market.

What we are seeing today in the mortgage industry is a result of innovation in product design and promotional activity. Whether this has gone too far is another question.

Julian Wells is head of marketing at Mortgages plc

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