The FSA has recently published a series of case studies together with details of the actions it took and why it felt these particular financial promotions fell short of regulatory compliance. Zoe Hare reveals the valuable lessons for advertisers in the financial sector to learn.
Topic: Financial services
Who: Financial Services Authority
When: July 2009
Where: United Kingdom
Law stated as at: 22 July 2009
The Financial Services Authority ("FSA") has recently published a list of example real life cases it has acted upon. The list of 10 cases published is centred on financial promotions and details the FSA's approach to the promotions used by the companies. The important point to note from the cases is that, regardless of whether the promotions were subject to specific rules on insurance etc, all financial promotions must satisfy the FSA's overarching principle of being "fair, clear and not misleading" to consumers. Below are three examples of the cases published by the FSA for the sector to learn from:
1. Case 1 – inappropriate use of the FSA logo and regulatory statement on a website offering foreign exchange and investment services
A boutique insurance brokerage firm advertised their foreign exchange and investment services on their website. The website contained a regulatory statement asserting that the firm is "authorised and regulated by the Financial Services Authority". The FSA deemed the information contained on the website to be misleading. Although the website contained the regulatory statement, the website also referred to matters which were not regulated by the FSA. The firm offered foreign exchange services linked to investment services which are FSA regulated, together with foreign exchange business for commercial purposes which are not regulated. The FSA considered that, since there was no clear distinction between those activities which are FSA regulated and those which are not, this would mislead consumers. Where there is no distinction, this breaches the FSA's "fair, clear and not misleading" rule. Furthermore, the website had reproduced the FSA logo. Although the FSA permits the use of its logo for paper and electronic communications, such as letters and emails, the licence does not cover websites. This was considered to be a clear breach of the FSA's rules.
In this case, the FSA required the promotion to be withdrawn and amended. The action taken by the FSA was particularly important in this case where there is no distinction between regulated and unregulated services. The FSA's commentary states that "the availability of FOS [the Financial Ombudsman Service] and FSCS [Financial Services Compensation Scheme] protection is an important element of consumer redress and may not be available in respect of unregulated activities.
Consumer detriment can follow where firms do not clearly differentiate between regulated and unregulated activities".
2. Case 2 – inadequate risk warnings and breaches of the FSA's past performance rules in a firm's press and outdoor promotions for a high risk product
An FSA regulated company had promoted its managed funds range through national newspapers and outdoor advertising posters. The advertising methods used for two of its funds in particular were identified by the FSA as in breach of its rules. The first issue was raised in relation to a press promotion in a national newspaper which made extravagant claims regarding the previous performance of the fund manager. However, the advert did not contain a warning stating that past performance should not be used as an indicator of future performance. This breached FSA's rules on past performance. The second issue arose in relation to the lack of risk warnings on a poster promotion for a different fund product. The FSA considered that the poster did not provide adequate warnings that an investor's capital will be put at risk. This is necessary where a product is promoted to consumers, or retail customers in this case. The promotion must again satisfy the FSA's overarching principle.
In this case, the FSA requested that the firm conduct a full scale review of all its promotional adverts and other material so as to ensure compliance with the FSA's rules. The FSA also held a meeting with representatives of the company in order to discuss their concerns and the best way to proceed. In order to remedy the breach of the past performance rules, the FSA did not consider it necessary to include a table of past performance data in the advert. Instead, the inclusion of the warning statement was sufficient. The firm's promotional material has since been amended. The firm has also stated that it has amended its systems and controls in order to prevent future breaches.
3. Case 3 – misleading image used on a leaflet for holiday
A high street retail firm used flyers and leaflets in its stores in order to promote its travel insurance services. The material showed images of a holiday scene with unattended personal belongings (such as mobile phones) together with a slogan suggesting that the policyholder could enjoy their holiday with the confidence that they would be covered for every eventuality. The FSA received complaints about this promotion as it suggested that their valuables would be protected in the case of loss where they are left unattended; however the terms and conditions of the policy itself specifically excluded certain items left unattended such as mobile phones. The material was considered to be misleading to consumers and in breach of the overarching principle. The images portrayed could give consumers unfair expectations about the extent of the policy.
The FSA contacted the firm with the aim of questioning how it would manage consumers' expectations and requesting it to withdraw the material if this could not be possible. The firm has removed the material from its promotion and has confirmed that all future promotions would be compliant with the FSA's rules.
Why this matters:
The list provided is particularly useful as it sets out the action which the FSA took in respect of each company involved and the lessons to be learned from each case. In most cases, the FSA worked with the company concerned in order to ensure compliance rather than taking tougher action and penalising the company. This suggests that the FSA is trying to move away from immediately penalising firms if there is another way to remedy the breach. In all these cases, the promotional material concerned was amended and so no further action was necessary. In the commentary for Case 1 above, the FSA states that "it is always important for firms to abide by our rules. In the current economic climate consumers may be more likely to base investment decisions on whether a firm is regulated and authorised by the FSA.". To summarise the main lessons learned from this exercise:
- websites can be classified as financial promotions and thus must comply with the FSA's rules and guidance;
- companies must take care in selecting the images used in their promotional material as these are highly influential and can mislead consumers; and
- all slogans, pictures, images and text used on promotional advertising must satisfy the FSA's overarching principle that it is "fair, clear and not misleading".