Central Bank questioning cash back

[Brendan Burgess]

In their consultation paper issued today

4.1.3 Use of incentives related to mortgages
A number of mortgage lenders offer incentives to consumers who are seeking mortgage
credit. These range from offers of a percentage of the mortgage directly back as cash to the
consumer to cash advances towards a consumer’s legal or professional fees. Some of the
offers are open to all prospective mortgage holders while others specifically target certain
categories of mortgage borrowers such as mortgage switchers. In its recently published
Options for the Mortgage Market the CCPC raised this issue and indicated that it will
undertake further research on the matter.

A number of existing provisions in the Code are pertinent here, including the general
requirements in Chapter 9 (Advertising) to ensure that advertisements are clear, fair
accurate and not misleading.

In addition, guidance issued by FinCoNet, the International Financial Consumer Protection Organisation, on sales incentives and responsible lending also
includes provisions on promotional incentives to consumers. The FinCoNet guidance states
that supervisors’ oversight should include consideration of the benefit of promotional
incentives offered to consumers versus the cost of the credit product. This oversight should
consider whether the benefit is significantly outweighed by the cost of the credit, including
having regard to how that cost of credit compares to other equivalent credit products;
whether specific disclosures or warnings are required; the timing and nature of the
presentation of the promotional incentive and how such timing and presentation may
influence the consumer’s decision; and when to restrict or prohibit this practice on the
grounds that the apparent benefit of the promotional incentive is in fact illusory.

The Code already includes a specific requirement on lenders when offering incentives to their
existing mortgage holders [Provision 6.12].

To ensure that consumers are also protected
when offered incentives on a new mortgage or a mortgage switch, we propose to extend this
provision and apply the same protections to all mortgage holders i.e. for new, existing and
switching mortgages.


Question 1 Do you have any views on the proposals to enhance the transparency measures
for fixed interest rates and for variable interest rates based on LTV? Please explain your
answer.

Question 2 Do you have any views on the proposal to extend the existing Code protection
on incentives linked to mortgages for existing mortgage holders to all mortgage holders i.e.
for new, existing and switching mortgages? Please explain your answer.

Question 3 What are your views on the impact of lenders offering incentives linked to
mortgages to consumers, whether in terms of risks or benefits to consumers? Please explain your answer(s).

 

[Brendan Burgess]

From the FinCoNet consultation paper Impact of Sales Incentives on the Sale of Consumer Credit Products

Promotional Incentives to Consumers
42. The Report researched incentives offered to consumers to encourage them to borrow.
The most popular type of promotional incentive to consumers was found to be
discounts offered in certain shops using specific credit cards, with cash back, payment
free periods, incentives for continued use of a credit card over the year, 0%
introductory rates and waivers of entry or other fees also being common. Promotional
offers of these types can influence the consumer in their decision to purchase a credit
product and make them more likely to judge the risks as low and the benefits as high.
Promotional incentives which are targeted at consumers can be beneficial for
consumers but only if, at the time that the incentive is being promoted, the consumer
has a need for credit and can afford to repay it.
43. The Report also found that many promotional incentives may appear to offer an
attractive ‘free’ benefit to the consumer when in fact it is outweighed by the cost of the
credit. An example cited in the Report concerns travel points or other loyalty
arrangements, where the promotional offering is complex and to be gained later. Here,
there is scope for the consumer to overestimate the value to them of the promotional
offering and/or for the financial institution to ensure that any perceived saving by the
borrower is clawed back over time through how the incentive is calculated.
44. The Report concluded that there is a need for governance arrangements when products
are offered to consumers on the back of incentives such as free gifts, bonus reward
points etc. Where the promotional incentive offered to the consumer is significantly
outweighed by the cost of the credit, the introduction of a disclosure requirement, or
the restriction of such practices should be considered.
45. Based on these findings, FinCoNet proposes the following Guidance on the Benefit of
Promotional Incentives to Consumers:

I. Guidance on Promotional Incentives to Consumers
Supervisors’ oversight should include consideration of the benefit of promotional
incentives offered to consumers versus the cost of the credit product.
This oversight should consider:
- whether the benefit is significantly outweighed by the cost of the credit;
- whether specific disclosures or warnings are required for misleading incentives; and
- when to prohibit or restrict this practice on the grounds that the apparent benefit of
the promotional incentive is in fact illusory.

 

[Brendan Burgess]

Here are the proposed changes, so it looks as if they are only discussing these issues and have no plans to do anything serious about them.