The Financial Services Authority has sought to answer recent “soft on ads” criticisms with a swingeing first fine for misleading financial advertising.
Who: The Financial Services Authority and DBS Financial Management plc
When: March 2003
The Financial Services Authority handed down its first fine for misleading advertising. The figure was £100,000 and the company was DEBS Financial Management plc. The offence was for approving a misleading direct offer advertisement for "protected ISAs" and for failing to improve its advertising approval procedures between 2000 and 2001. The direct offer advertisement offer had actually been issued by an entity called Ensuredirect.com Limited, but it did this as an appointed representative of DBS, whose legal responsibility it was under the Financial Services and Markets Act 2000 to approve the advertisement.
The 24 page colour brochure was distributed as a supplement with 4.5million copies of national newspapers. The product was complicated and had many unusual features which would have been unfamiliar to readers of those papers. DBS should have ensured, the FSA said, that the advertisement would be understood by its likely audience and also that it presented a balanced picture of the investment and the risks involved. Amongst the misleading claims made by the advertisement were the following:
the nature of the investment – an indication that it provided "100% capital security over 5 years", when this only applied at the fifth anniversary of the plan;
the charges – promising "all at no initial charge" on the front cover of the brochure, when there was an initial charge of up to 6% and an annual management charge of up to 1.2% per annum;
the growth of the product and the "price" protection – the advertisement indicated that the "protected funds were related to six of the most popular ISA funds available". In fact investors received the average daily price during the 5 year investment period, not the full growth of those selected funds;
future growth – this was based on two examples assuming 14.4% and 22.9% growth per year respectively. But these projections did not take into account the effect of averaged returns and was substantially in excess of the growth rates that were allowed to be assumed for ISA type investments.
So far as internal procedures were concerned, those at DBS were clearly inadequate. When the "protected ISA's" advertisement was approved in June 2001, the DBS Advertising Officer was not qualified to do the job and was unfamiliar with the product. There were also no procedures in place to ensure that when an advertisement had been rejected by the Advertising Officer and then resubmitted, the officer then reassessed the whole advertisement prior to final approval. In addition, DBS had failed to follow instructions to improve its advertising approval procedures, following a previous visit by the FSA in March 2000.
The stiff £100,000 penalty was imposed pursuant to section 206 of the FSMA 2000 in respect of breaches by DBS of PIA Rules 4.1, 7.1.2, 7.1.5, adopted FIMBRA Rules F18.3, F18.7(1), F18.10, F18.11.3(1) table F18B and F29.8.3(1) and F18(B) and F29.8.3(1) and SIB Principle 9.
Since the breach occurred DBS has been acquired by Misys Life & Pensions, a subsidiary of Misys plc, which is the controller of five IFA Networks. The senior management in place at the time of the breach of the rules are no longer connected with DBS and extensive action is being taken to ensure that the appropriate systems and controls are now in place for approving advertisements.
Why this matters:
In recent months the FSA has been making noises to the effect that it is going to "get tough" on financial services advertisers who break the rules. Here is the first concrete example that it meant what it said.
Also, earlier this year, the FSA called on consumers to help it clamp down on financial advertising by sending in examples of advertising that they thought was misleading.
There are also noises being made suggesting the FSA will push for more powers to go public on its complaint handling procedures in respect of financial promotions.
All in all a picture that underlines the need for financial services promoters to take every care when it comes to introducing and following procedures for ensuring the compliance of advertising content.