The FSA’s routine monitoring of financial promotions practice carries on apace. In its fourth financial promotions Update since July 2009, unsubstantiated pricing claims such as “we beat any quote” come under scrutiny and the FSA fires a warning shot. Jonathan Mayner reports.
Topic: Financial services
Who: Financial Services Authority
When: October 2009
Where: United Kingdom
Law stated as at: 26 November 2009
Routine monitoring by the Financial Services Authority ("FSA") has revealed that many pricing claims in insurance promotions on websites and in magazines do not comply with the high-level rule that all financial promotions should be “clear, fair and not misleading”. Consequently, in October 2009, the FSA published its fourth Industry Update, this time focused on the issue of pricing claims in insurance promotions.
The FSA is concerned that consumers are potentially disadvantaged by being induced into buying products by promotions that contain unclear or unsubstantiated pricing claims. Additionally the FSA has used this update to make clear its stance on pricing claims made in television advertising.
Meeting expectations generated by pricing claims
While the FSA does not define “pricing claims” in its extensive glossary, its Insurance Conduct of Business Sourcebook (ICOBS) provides specific guidance in the context of insurance promotions (ICOBS rules and guidance on insurance promotions can be found in the FSA Handbook online at www.fsahandbook.info/FSA/html/handbook/ICOBS/2/2.).
Accordingly, a promotion will be deemed to include a pricing claim where it includes any indication or implication that that the insurance provider can reduce the premium, provide the cheapest premium or reduce a customer’s costs (ICOBS 2.2.4G(1)).
To ensure that insurance promotions do not fall foul of the “clear, fair and not misleading” rule there should be no discrepancy between customers’ legitimate expectations created by a promotion and the actual experience that the average customer targeted by the promotion has when responding to it. Promotions that attempt to induce customers to purchase insurance by making claims such as “we guarantee to beat any quote”, “we have the lowest premiums” or “we offer the cheapest insurance” often set expectations that may not be met when the customer contacts the firm for a quote.
The FSA’s rules and guidelines on insurance promotions state that such a claim “must be consistent with the result reasonably expected to be achieved by the majority of customers who respond, unless the proportion of those customers who are likely to achieve the pricing claims is stated prominently ”. As such, insurance providers should advertise a price that they expect the majority of respondent customers will achieve, or where they expect that only a minority of customers will achieve the advertised price, they must prominently state in the promotion the proportion of customers who they expect to achieve that price.
Unsubstantiated headline claims may be misleading not only if they do not provide adequate information about customer eligibility, but also if they do not provide adequate information about the level of cover provided for the headline price. The FSA is concerned that low premiums advertised in some promotions are only available in relation to policies that provide insurance cover which is significantly limited or qualified. Under ICOBS, insurance promotions should prominently state the basis for any claimed benefits and any significant limitations that will be placed on the insurance cover provided to customers who avail themselves of an advertised low premium (ICOBS 2.2.4G(2)(b)).
Additionally, promotions which claim that a provider is offering the “lowest price” often contain no substantiation or basis for meaningful comparison with products or claims put forward by competitor firms. The FSA is taking the view that consumers may therefore be denied the information they need to make a genuinely informed purchasing decision, and the market may be distorted by the undermining of fair competition.
Substantiation of pricing claims
Pricing claims should be substantiated, and such substantiation should be sufficient to allow customers to comprehend their likely eligibility for the headline price, and to allow meaningful comparison between competitor firms and products.
One way in which firms have attempted to substantiate (and at the same time qualify) their pricing claims is to include in the promotions example quotes based on very specific criteria. A promotion for motor insurance may for example substantiate a pricing claim by stating that a driver with particular profile (for example, with regard to gender, age or years of driving experience), with a particular model of car, would achieve the price stated.
The FSA contends that good practice in this area would be rather to base the given example on the average consumer targeted by the promotion. Moreover, if a promoting firm does not reasonably believe that the example criteria will apply to the majority of targeted customers then the firm must disclose in the promotion the proportion of customers who are likely to achieve the pricing claim.
Firms should also avoid making pricing claims based on outliers without making it clear that they are doing so. As such, insurance promotions should not use general statements such as “save £100 on your home insurance” if only 10% of the target audience are likely to qualify for such a saving. Even where a promotion qualifies such a claim with the words such as “save up to £100”, the promotion should substantiate the number of respondents that are expected to achieve the saving. The FSA routinely requires firms making such claims to submit the basis of their calculations of pricing claims in order to establish whether the majority of customers will achieve them.
The FSA has used this recent update to reiterate that the “clear, fair and not misleading” rule applies to television advertising, just as it does to other media. Even in short television advertisements, the FSA expects to see sufficient substantiation of headline pricing claims. Where such substantiation comes in the form of superimposed text information, as it usually does, firms have been reminded that the codes of the Broadcast Committee of Advertising Practice, administered by the Advertising Standards Agency, will apply .
These codes apply certain technical and other requirements regarding legibility and complexity of superimposed text, but crucially, they also state that while text may expand or clarify a claim, or add minor qualifications, it must not contradict the claim . Insurance promoters advertising on television must be careful therefore when using superimposed text to substantiate or qualify eligibility for headline pricing claims.
Why this is important
The FSA publishes these Industry Updates and other thematic reviews as a means of early engagement with firms before exercising its other powers of enforcement. The regulator will currently be engaged in discussions with those firms whose practices in the area of insurance pricing claims it has been dissatisfied with. As part of its commitment to consumer protection, the FSA has warned that it will take action against firms whose promotions are not compliant with the rules and guidelines set out in ICOBS. As such, insurance providers would do well to review their recent and current practice and identify and amend any pricing claims which, while they may draw in bargain-hungry customers, may also attract the unwanted attentions of the FSA.