Nic Cicutti: Sellers still need policing
Am I irrational? Do I make decisions based on completely incorrect reasoning that, had I given them a nanosecond’s thought, would have been radically different and better?
As I write this, I can already imagine one or two if you sharpening your quills and other writing implements, ready to strike.
But my question is a serious one. As Money Marketing told us last week, it is an issue that has recently been uppermost in the minds of the new honchos at the Financial Conduct Authority.
FCA head Martin Wheatley gave an interview to the FT in which he argued that regulators need to “step into the footprints of investors” - who cannot be counted on to make rational choices - to limit or ban the sale of potentially harmful products.
He said: “You have to assume that you do not have rational consumers. Faced with complex decisions or too much information, they default… They hide behind credit rating agencies or behind the promises that are given to them by the salesperson.”
Which is why, when the FCA is launched next year it will have the power to ban products that could cause consumer detriment, or limit their sale to certain types of consumers. Wheatley told the FT such interventions will be rare.
I was baffled by his reference to “hiding behind promises given to them by a sales-person”. I would have thought that, yes, while the capacity to independently assess and make up your own mind about the suitability of a product is important, what a salesperson tells you about it is equally vital.
Maybe Wheatley was referring to the kind of boiler-room product where dodgy telephone salesmen try to ram shares down the throats of elderly victims.
Either way, despite the sarcastic opprobrium poured onto his head by some MM regulars on the website, the approach is a sensible one. Wheatley is not saying the FCA will regulate and/or ban every product on the market only that some will be limited in terms of how they are sold, or barred in very rare cases.
The PPI analogy Wheatley gave is quite a good one. After all, what we had here was a potential need by some consumers for a product that protected them in the event of not being able to repay their loans. Yet what was designed was, in a massive number of cases, completely unsuitable for their needs and benefited only the seller.
I will come back to PPI later but it is also worth nothing that it is impossible to completely protect consumers from their own irrational financial purchase decisions.
Human beings are not, in the main, cold calculating machines. We do not have perfect information about all the alternatives and it is difficult to weigh up all the pros ands cons.
Sometimes we make rule of thumb decisions, for example, when deciding where to go and buy our foreign currency from. Yes, online could probably deliver a better deal but the Post Office is good enough for most of us.
Sometimes, decisions are highly emotional - buying a car or a house spring to mind. At that point, consumers are highly aroused. Small wonder then that so many of them will opt for a loan through the showroom, or the mortgage and accompanying repayment vehicle available from the estate agent.
I recall a former compliance officer at a national firm of estate agents telling me the mortgage endowments his company sold needed to grow by 6 per cent annually simply to meet inflation and charges. Yet sales were spectacularly good for years.
For some of us, the context in which we buy has an effect. As a regular online user, a company’s website design, its layout and navigation, the way information is provided, the ease of use generally and how much I am prepared to trust it as a potential provider, all have a major effect.
There are also other fears and so-called cognitive failures on the part of consumers, for example where I am scared to realise losses. I still hold a small proportion of my overall portfolio in a former internet fund. Since losing 70 per cent of its value 10 years ago, it has moved sideways. Yet I persist with it, in the forlorn hope that the fund manager may eventually be proved right to the same spectacular extent as he lost my money in the first place.
All this makes me a realist. Contrary to what some MM readers believe, I do not assume the FSA, or the FCA next year, can protect me in every eventuality. But assuming consumers need some protection, product regulation - as opposed to designing products - is part of that strategy.
Which brings me back to PPI. You see, PPI products were not just poorly-designed products that were simply placed on some financial shelf for unsuspecting punters to pick up. They were actively sold by human beings to other human beings.
Quite rightly, the vast majority of IFAs had nothing to do with them but over the years there have been plenty more inadequate products that independent advisers filled their boots with.
You can regulate the product all you like. But at the end of the day, the seller still needs policing too.
Nic Cicutti can be contacted at firstname.lastname@example.org