The Financial Services Authority is reviewing its enforcement approach and has published a consultation paper on “Transparency as a regulatory tool”. Has it decided finally to follow the ASA example and publish financial promotions case reports? Kate Johnson investigates.
Topic: Financial services
Who: The Financial Services Authority
When: 27 May 2008
Law stated as at: 22 June 2008
The Financial Services Authority ("FSA") has published a discussion paper entitled "Transparency as a Regulatory Tool". A section of this discussion paper focuses on financial promotions and, in particular, how else the FSA can use its powers to reduce the risk of consumers making poor buying decisions based on information in financial promotions that is unclear, unfair or misleading. The FSA intends on targeting both the overall number of financial promotions that present such a risk, and the size of the risk presented by individual promotions. Its objectives are to tackle the following four areas:
* education: reduce the risk to consumers by helping firms to understand the FSA's financial promotions requirements and expectations;
* deterrence: develop tools that create a penalty for firms that either repeatedly commit minor breaches of the spirit or letter of the financial promotions requirements, or commit a fundamental breach of the requirements;
* prevention: put procedures in place that reduce risks to consumers; and
* confidence: achieve greater confidence in the financial system by consumers and firms by facilitating the scrutiny and accountability of the FSA's activities regarding financial promotions.
Specific steps the FSA is considering with respect to each of these objectives are:
Education: publishing 'real life cases', on a no-name basis, containing the high level details of the financial promotion, the FSA's concerns, and the action the firm took because of the FSA's intervention.
Deterrence: developing a fast-track enforcement procedure for cases where public censure, rather than a fine, is the most likely and appropriate outcome. Such a process would be used where the evidence of the breach of the financial promotions rules is clear and the FSA could establish this without an extensive investigation.
Prevention: using non-fundamental Own Initiative Variations of Permission (OIVoPs) whereby the FSA, on its own initiative (rather than on request of the firm concerned), uses its power to vary or cancel a firm's permission to undertake regulated activities, meaning the firm's ability to undertake those regulated activities would be narrowed or taken away entirely. The FSA would do this when it has significant concerns about a particular financial promotion or the systems and controls that led to the publication of the promotion, which warrants immediate action. The scope for action here is extremely broad but actions taken might include requiring a firm to:
* withdraw a specific financial promotion;
* use an external person/firm to confirm the compliance of a financial promotion for a period;
* provide specific training to the team that approves financial promotions.
Confidence: publishing enhanced metrics on the FSA website including details of the number of promotions the FSA has monitored, the number and source of complaints about promotions received, and the number of advertisements considered in more detail, as well as publishing the number of financial promotions that firms have withdrawn or amended because of the FSA's intervention.
FSA decides against "name and shame" for now
At this stage, the FSA has decided against using a public register which would adopt a "name and shame" policy, in other words disclose the details of firms that have amended or withdrawn a financial promotion at the FSA's request. The FSA has taken this decision for three main reasons:
* the possibility that such a register would result in reputational damage to firms that was disproportionate and unfair, leading to firms being less willing to make changes to their promotions for fear of appearing on the register. This would be a disadvantage to the FSA which is dependent on the co-operation of firms to make changes or withdrawals quickly to minimise risks to consumers;
* a more general register would be of less use to consumers as an educational tool than using a smaller number of examples that focus on the worst cases; and
* the existence of a register could be a disincentive to innovation in financial promotions if firms became more cautious about their interpretation of FSA requirements.
Why this matters:
The FSA currently has financial promotions under the microscope and is taking a number of steps towards facilitating a much higher level of compliance across the industry through its enforcement processes. A higher volume of financial promotions will be targeted and stricter penalties for the more serious breaches will be implemented. As a result, all firms will need to take a stricter view towards the content of their advertising if they want to avoid the various penalties threatened by the FSA.
Advertising agencies who create advertising material for financial services clients will have to ensure they are fully up to date with the financial promotions regime. If they are not, then they run the risk of exposing their clients, as well as themselves, to a breach of the rules by generating non-compliant advertising material.
If the FSA implements the proposed expedited enforcement process for less serious breaches of the financial promotions regime, then an ad agency which prepares non-compliant material could potentially risk public censure for both the client firm and for the agency itself. For more serious breaches, a client firm could lose its authorised status.
On the plus side, the FSA's commitment to improving its lines of communication and education around the financial promotion regime itself should assist advertising agencies to ensure they are fully compliant with the regime when creating advertising material for financial services clients.