Complexity & client understanding
My wife has just migrated from her old clicky Nokia mobile phone to an iPhone. It took a while to persuade her to make the transition, but this was in the end expedited by the imminent dissolution of the old handset which looked as if it had first been eaten, and then excreted by some carnivore, generously equipped with pointy fangs. Being a long-time iPhone user, I had underestimated the learning curve associated with a whole new way of 'doing phone', and it's true to say that modern smartphones are phenomenally complex items.
The products we buy are often complex. There are whole areas of functionality within my iPhone 6s that I doubt very much I will ever fully get to grips with, and there are other facilities which I am familiar with, to varying degrees - sufficient to derive some kind of benefit from them. The physical device itself is held together with tiny screws which are almost too small to view, so there is precisely zero chance that I will ever succumb to the desire to open the thing up, and take a look inside. Indeed, why would I? The novelty of being able to view the guts of a disembowelled smartphone is hardly going to enlighten me as to how the thing actually does what it does.
OK, we're 'just' talking about something that will slip into your pocket: so what about a larger scale for consideration? Take the guy who decides to buy a Lexus Hybrid in order to save the planet. There's all kinds of complex wizardry going on under the bonnet. Does the owner need to know exactly how the hybrid drive actually works in order to benefit from the fact of its working? Or, to put it another way, might one's ignorance of (say) the complex algorithms programmed into the main CPU somehow detract from the benefit of owning the car? Would you take the car salesman to court because he or she had not ensured that you fully understood the workings of regenerative braking before you shelled out a whopping amount of cash?
In a rational world, the answer to all of those questions would be 'No'. If the car didn't work, then that would be another matter - but the car owner does not need to have access to, and understand, the level of technical intelligence that would be the province of the engineer who designed the thing. Indeed, not even the car salesman would be familiar with the subject on that level. The absence of that kind of knowledge doesn't in any way impair the benefit of owning the car.
The FCA is currently calling for inputs on competition in the mortgage sector. One key challenge they are seeking to address relates to the consumer's ability to access complex product information, and then act upon their understanding. The FCA's own mandate seeks to take into consideration (a) the complexity and transparency of information, and (b) consumers' behavioural biases, but the real thrust of this exercise is on ensuring that consumers make effective choices.
This raises all sorts of interesting questions. The FCA's consideration invariably seems to dwell on the role of the individual as a 'consumer'. This doesn't seem to be a natural fit with the advisory marketplace: what is it, precisely, that the 'consumer' is consuming? It may not be a product, per se - it may be the bare substance of advice. If that is the case, then the whole framework for presenting a given type of product lies in the nature of the advice being given. The 'effective choice' that the client is making therefore is all about the selection of the adviser who is going to mediate whatever financial solutions that need to be recommended. Or, to put it another way, if the adviser's professional opinion is that Product A should be used, but the client, through some obscure access to arcane knowledge, has determined that Product Z is preferable, we find ourselves at something of an impasse.
Behind the FCA's concern about informed consumers, is a rather deeper philosophical consideration about the nature of knowledge, and the extent to which we have it. If turning on an electric light does not require me to understand the physics of nuclear fission which may have generated the electricity that powers it (for I am a 'consumer' of electrical power), then purchasing my home with an appropriate mortgage does not require me to possess a comprehensive knowledge of the underlying mortgage contract. That I will have some knowledge, which will help 'inform' my choice, is not the issue: rather, the question revolves around how much knowledge I need, and at what level of depth, if I have entered into an adviser-client relationship with a professional adviser?
I am not convinced that the Regulator is thinking about this kind of issue. Certainly, the blanket nature of regulation appears to obscure the variances between the different channels for advice: a client who feels competent enough to deal direct with a product-provider might well feel that he or she is capable of making sense of the copious amounts of information which might thereby be generated. On balance, I would be skeptical that this would ever be a likely outcome. In any case, the very nature of intermediation presupposes the existence of a class of individual, equipped to handle that degree of technical nuance - namely the Adviser.