Money Advice Service pamphlet on interest only mortgages could actually see borrowers procrastinate says behavioural finance professor

17th December 2013

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A professor of behavioural finance has questioned the Money Advice Service’s strategy for getting consumers to take action when they have an interest only mortgage with no repayment vehicle.

The views of Professor Daniel Read, professor of behavioural finance at Warwick Business school, have been published by lenders’ trade body the Council of Mortgage Lenders, though the organisation says it does not necessarily endorse them. Professor Read was due to present his views about lenders’ letters to interest only mortgage customers and how to get them to do something about the need to repay the capital sum at the CML conference earlier this year but was unable to do so.

In an article, published by the CML and co-authored with PhD student Ali Osseiran, Professor Read gives seven golden rules that he believes should be included in letters to customers. But he also says the Money Advice Guidance pamphlet breaks the first three.

Those first three rules are 1) simplicity including using as few words as possible,

2) getting to the point i.e. telling the customer what you want them to do with justification for why

3) asking for what you want and not more for example by not giving a menu of options.

(We print all seven rules in full at the end of the article.)

Discussing the MAS pamphlet, Read and Osseiran write: “Violations of the first three rules can be found in the familiar Money Advice Service pamphlet “Take action with your interest-only mortgage now”. This attractive and well-written pamphlet was cited approvingly in the Financial Conduct Authority’s original press release, and is in wide circulation. The pamphlet provides those who do not have a plan in place with five steps to take, and those who do have a plan with (surprisingly) six steps. In fact, however, the steps are not steps at all but a list of actions that can be taken in any order and in any quantity. They do not even appear to be in order of priority. Moreover, the “steps” all appear to be non-trivial projects, each containing many steps and are very likely to lead to a high level of procrastination.”

Those rules are included below so Mindful Money readers can see if they might work for them.

Rule One: Simplicity. Simplicity has a lot of meanings, but to put it simply you should use as few words as possible, and make those words as concrete as possible. Simplicity is needed to get your customer to read the letter, and to ensure that the message you want to send is the one that is received. For each sentence you have written, ask if your customer needs to know the information in that sentence. We suspect you will find that often they will not.

Rule Two: Get right to the point. Tell your customer what you want them to do immediately and provide justification for that request alongside it. Letters commonly begin in a roundabout way that describes the problem, and then gets to the solution. That is ok for a literary essay, but not for a request for immediate action. It is possible, for instance, that you have written a preamble that reminds your customers of what an interest-only mortgage is, as well as some legal details about such mortgages.   Yet what you want your customers to do might be to sign a form acknowledging that they understand the conditions of their mortgage, or to provide a summary of their repayment plan. The preamble can distract from that message. The preamble also increases opportunities for misinterpretation and unnecessary customer distress.

Rule Three: Ask for what you want, and do not ask for more. In particular avoid providing an extensive menu of options. Behavioural scientists have found that too many options can lead to confusion, procrastination, feelings of uncertainty and regret, and even withdrawal from the choice situation. For instance, researchers from Columbia Business School found that increasing the number of investment options in a retirement plan significantly reduced the participation rate in that plan. This is because most individuals do not have the time or the expertise to evaluate all the options available to them, making it very difficult to make a decision, especially a financial one.

Rule Four: Put the information where it counts. Research using eye-tracking has taught us a lot about where people look when they are reading letters. The most important findings are that people focus on the centre left hand side of the letter body, and also on headings, tables and images, and that text size matters – text in larger fonts receives more attention. Moreover, detailed text is often ignored. As much as possible, therefore, you will want to make the core message easily derivable from these regions. In particular, the action you require of your customer should be in the top half of the letter, be in a large, bold font, and in a different colour than what surrounds.

Rule Five: Set a deadline. The biggest enemy for a letter campaign requiring a response is procrastination. A task postponed is often a task abandoned. We have a habit of putting off impending tasks. This widespread tendency is seen in people who put off doing minor chores, in dieters who repeatedly declare they will start their diets tomorrow, and in columnists who delay writing their articles (excluding, of course, the authors of this article). Procrastination is particularly likely when the task is not perceived as urgent, as in making a nonobligatory response to a letter about a debt that will not materialise for another 10 years or more. Research in psychology has shown that setting even a soft deadline can reduce the tendency to postpone tasks indefinitely. Hence, setting a deadline to respond to the letter could promote a sense of urgency, motivate the recipients to act, and prompt them to do so more quickly.

Rule Six: Use norms. Norms come in two types, descriptive and injunctive. Injunctive norms are what we use when we learn that others believe something is the “right” thing to do; descriptive norms when we learn that others are doing it. People are more likely to respond to your letter if you can (truthfully) inform them that others believe they should do so, or that others are actually doing so. A recent study conducted for HM Revenue & Customs by researchers at Imperial College London found that mentioning each kind of norm separately increased compliance with a request to pay tax.

Rule Seven: Align intuition and reasoning Daniel Kahneman’s recent book “Thinking Fast and Slow” brought the concepts of intuition (System One) and reasoning (System Two) to the mainstream. People’s response to a message will be a combination of a fast, automatic and emotional reaction, and a slow, deliberate and intellectual one. Because the emotional response is instantaneous, it provides the tone with which the whole letter, if it is read at all, is evaluated.

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