Financial Services Authority proposals allow continued use of past performance figures in financial promotions, but there’s a big catch.
New law/regulation:
Proposed new Conduct of Business Rules Amendments and Guidance dealing with use of past performance figures in financial promotions.
Background
The Financial Services Authority has for some time been expressing grave concern about the use of past performance indicators in financial promotions. In a consultation paper issued in April 2002 (CP132) it proposed measures in this area. These were all directed at producing more balanced advertising and discouraging firms from using past performance figures as marketing tools.
Having considered the responses to that consultation paper, the FSA has now published "CP183" entitled "Standardising past performance". This goes granular on proposals for mandatory inclusion of standardised past performance information in all financial promotions that refer to a product's past performance. This stems in part from responses to CP132, which show broad support for this approach amongst both consumer representatives and the industry.
Previous research showed two worrying strands. First of all the tendency on the part of consumers to put undue weight on past performance when making decisions about the purchase of financial products. Secondly, the tendency of firms to "cherry pick" their past performance history, a practice which in some circumstances could become positively misleading.
Other considerations coming out of previous research underlined the general dislike and distrust amongst consumers of "excessive amounts of small print" in financial advertising, the tucking away in small print in the ads of current mandatory information about a product's performance over the past five years, and the raising of unrealistic expectations by showing exceptionally high past returns.
Proposed changes:
The end result of the FSA's deliberations is a proposal to introduce a requirement for the inclusion, wherever past performance is referred to, of mandatory information by way of figures, expressed in percentages, showing the "simple returns" on the product advertised. These should be based, it is proposed, on "discrete annual returns" over the past five calendar years.
This was preferred to, for example, returns on a hypothetical past investment expressed in pounds sterling (e.g. "£1,000 invested in 1998 would have yielded £1417.41 by 2003"). This appears to be because figures presented in this way may give rise to unrealistic expectations. Indeed, the FSA has taken generally against the presentation of information in these terms and it proposes to give guidance to firms indicating that such an approach should not be used for mass market promotions.
Also, to avoid the problem of the past of the mandatory information being tucked away in the small print, the suggestion is to require that the mandatory information appears no less prominently than any other information as to past performance which the advertiser chooses to put into the promotional material.
Proposed timetable:
The current consultation period on CP183 closes on 12 September 2003. All responses will be reviewed and the feedback will be published in the final policy statement in November 2003. It is then proposed that there will be a six month transitional period before bringing the new rules into force, taking us to May 2004.
Next step:
Submission to the FSA by all interested parties of their comments on CP183 by 12 September 2003.
