In its recent publication ‘Taking stock and moving forward,’ the financial services regulator reports its progress in regulating financial promotions to date, gives some common examples of non compliance and forecasts its strategy in the coming year.
The Financial Services Authority
Financial services regulator the Financial Services Authority ("FSA") published a position paper entitled "Financial Promotions: taking stock and moving forward".
The paper does exactly what it says on the tin and is a helpful indication of the FSA's current and future policy as regards the regulation of financial promotions.
Financial Promotions Department grows
The paper reports that the Financial Promotions Department formed by the FSA in April 2004 has been recruiting heavily and now has 30 staff. It regularly reviews promotions in the media, investigates complaints made to it about advertising material that is felt to be non-compliant, assesses firms' systems and controls through visits, communicates with the industry and consumers about the work it is doing and what it can do to help stakeholders and takes appropriate regulatory action where there is non-compliance.
The department works "predominantly in a thematic and risk-based manner", sometimes focusing on specific products, perhaps those that are new to regulation, or products that are particularly complex or risky. On other occasions it looks at a particular sector of the market and in other instances focuses on a particular medium such as websites.
High risk focus
A clear message coming out of the paper is that the department does not have unlimited resource and is therefore focusing its resources on areas where there is the highest risk to consumers.
One section of the paper talks about the number of possible outcomes from a situation in which a promotion is believed to be non-compliant. The FSA may:
· accept the advertiser's position on why it believes the promotion is compliant;
· ask the advertiser not to issue the promotion again;
· ask the advertiser to amend the promotion or withdraw it (here if an advertiser does not agree to withdraw, the FSA can vary the advertiser's authorisation or seek an injunction to require it to withdraw);
· if the FSA believes there has been actual consumer detriment or that consumers have bought the product on the basis of a non-compliant promotion, it may ask the advertiser to offer "remediation" to these consumers, possibly by allowing consumers to withdraw from the product without penalty or by offering compensation;
· a reference to the FSA "Enforcement Division" to issue a "private warning" or for further investigation and possible disciplinary action – this could result in a number of outcomes including public censure or a financial penalty.
Examples of recent enforcement
The paper mentions some recent cases.
AXA Sun Life was recently fined £500,000 for publishing misleading promotions which did not provide customers with sufficient information about how the product worked or the risks involved. The design, content and format of the promotions apparently focused attention on the benefits of the product including the offer of free promotional gifts but gave less prominence to key information about the risks. There was also comparative data that was inaccurate.
Separately Cantor Index was fined £70,000 for a misleading campaign promoting spread-betting. The company's management failed to ensure that there were adequate systems and controls in place to ensure the promotions were systematically monitored.
In the third case, Hemscott Investment Analysis was fined £50,000 over a promotion using the slogan "we even make a bear market all soft and cuddly". Apparently this had completely bypassed Hemscott's approval procedures and selectively quoted past recommendations by the firm, only using the best performing recommendations rather than a cross section.
The paper describes the visits which the FSA makes to authorised firms to check on their internal systems and controls, bearing in mind the FSA Handbook's strict requirements as to back office systems that are required to ensure that only compliant marketing communications are published. All financial services advertisers are encouraged to check their systems against the Handbook to ensure that they are compliant in this regard.
Improved FSA website
Although the FSA makes it quite clear that at no time will it provide a pre-vetting service for advertisers, nor will it provide comments on individual promotions sent to it, it is seeking to improve its consumer web pages and bulletins, which are issued periodically.
It also launched its "Financial promotions hotline" in July 2004 and by the end of the year had received 164 reports of financial promotions that were believed to be non-compliant.
Some more facts and figures
Between April and December 2004 the FSA's "thematic" work included reviewing 30 websites, resulting in 6 cases where enforcement action was taken, reviewing 50 direct mail promotions resulting in 14 enforcement cases and reviewing 20 TV and radio promotions resulting in five enforcement cases.
The paper goes on to contrast the new mortgage and general insurance regulation regimes. It makes it quite clear that different risks are associated with general insurance products as compared to the promotion of investments and mortgages for example. The FSA says it takes this into consideration when deciding on its overall priorities. There could be a hint here that less rigorous enforcement action may be taken, at least in initial instances, where there is no risk for instance to an individual's life savings from alleged mis-selling of an insurance product.
A helpful section of the paper includes some fictitious advertising which includes copy and claims which the FSA has come across in real life. These are criticised and the areas of non-compliance highlighted. Particular issues focused on include clarity of the product, indicating clearly what the product or service is, secondary risk warnings and the requirement to present a balanced indication of the product, not burying risk warnings in small print for example or on the back of a brochure and also percentages and headline claims, where unrealistic and misleading headline figures should be avoided.
Website promotions pitfalls
In its review of financial promotions on line, the FSA has found two common types of non-compliance. These are non-compliant past performance warnings and the use of the FSA logo on sites when this is only permitted on letters or electronic equivalents.
Direct offer material issues
Specific deficiencies found in the FSA's monitoring of direct offers included a lack of balance. For instance, there were a number of cases where significant risks were explained in the key features document but the key benefits were outlined in the cover letter. The FSA would expect to see a balance of risks and benefits in the cover letter so that messages about risks or drawbacks are not diminished or obscured by their placement elsewhere in the pack.
Separately, proper account was not taken in many cases of the target audience, with more complex products being more challenging in terms of ensuring the information is provided in a way that allows the consumer to make an informed decision. In other cases the communication did not seem to be tailored for the medium being used, with websites for example there is often no clear route through the site. Firms need to take this into consideration when developing their sites.
Questions to consider
Two other helpful sections of the paper list out questions to consider both for producing compliant promotions and for internal systems and controls.
As far as compliant promotions are concerned, advertisers are encouraged to take a step back and look at the communication from the perspective of the audience it will be exposed to.
Advertisers are encouraged to ask whether the promotion suggests a product or service is free of charge when in fact there are charges, to focus on what drawbacks need to be mentioned, for instance, penalties for withdrawing the investment early and a reference to any guarantee in the promotion, in which case it must be clear what exactly is being guaranteed and that the guarantee must be a real one in a sense which the consumer might understand.
As regards control systems, senior management must ask itself whether they have in place procedures that are accessible, clear and are used in practice by those designing, approving and producing financial promotions. These systems and controls must adequately apply to electronic as well as paper financial promotions and there must be clear accountabilities for design/approval of material. Records must be adequate and suitable training must be provided on the rules and processes for staff involved in designing and approving financial promotions.
In terms of its future work, the FSA makes particular reference to mainstream lenders, equity release providers and brokers, sub-prime lenders and brokers and debt consolidation lenders and brokers.
A review of mortgage networks' systems and controls is also being conducted, whilst in the area of general insurance, the FSA will focus on the promotion of those products that it believes might pose a relatively high risk to consumers, for instance those targeting the vulnerable or when unnecessary cover may be sold using inaccurate or false claims.
Information for stakeholders on the outcomes of these themes will apparently be available in the first half of 2005.
Why this matters:
The FSA is clearly continuing to up its act in the area of financial promotion regulation and this paper is a very helpful indication of its priorities and the particular issues that will excite the interests of the regulator going forward.