Financial Promotions Cardiff 2005
The South West (and Wales) region was pleased to be welcome back once again to the capital of Wales by our hosts Legal & General. We were especially privileged to here from Tony Katz, FSA Financial Promotions Manager and Mike Cowie Legal & General’s Regulatory Developments Technical Manager a name familiar to most of us having worked for many years at PIA and FSA. We were also pleased to see a good attendance at the event especially to new members attending their first meeting.
Tony Katz began with a talk outlining work done since last April when the new financial promotions teams have been in place at FSA and looking forward to future developments including the potential impact of MIFID.
The key part of the FSA focus for financial promotions is clear, fair and not misleading. It is FSA’s view that once a consumer believes a product may be suitable from a financial promotion it is difficult to dispel that belief subsequently. The FSA continue to look for new risks with the aim of preventing a misselling scandal before it happens.
There has been a realignment of teams around the TCF agenda with the financial promotions teams split by Review and Remediation, Visits and Communications and Strategy. Cluster work has been carried out around TCF looking at the ‘nitty gritty’ and how firms react to complaints about financial promotions. FSA Visits team are more like Supervision and Communications and Strategy is looking at how the rules can move towards a more principled-based approach. Consumer protection powers and unfair contract terms is a big issue. Making firms not enforce unfair terms is something FSA will pursue including seeking an injunction from the court if necessary.
Principle based means focusing on clear, fair and not misleading and achieving balance through seeing the drawbacks with equal prominence to the benefits. FSA rely on intelligence and focus on where there is the greatest risk. By taking pre-emptive steps FSA aim to avoid the risks before they happen and aim to achieve this through acting in a thematic way. FSA will focus on new products and high-risk areas, the national press and TV and radio advertisements as well as reviewing direct offer material.
Firms also make good use of the FSA hotline, which provides qualitative information they can use. When consumers use the help-line this is also useful but on a more basic level. Firms rightly feel that if they have to comply with the rules then so should their competitors and this is especially the case with mortgage firms. There are now about 500 reports on the FSA website.
There have been about 40 thematic visits equally split between providers, networks and brokers. The reviews aim to establish whether there is anything systematic and take action using regulatory tools including withdrawing or amending the advertisements, remedial action, a private warning or ultimately enforcement. However the promotions team is not enforcement le and they only act for serious or persistent offenders.
The recent focus has been on mortgage and general insurance advertisements. Some brokers do not understand what constitutes a financial promotion. They only see a newspaper advertisement as a promotion but fail to consider letters to consumers, websites, yellow pages or even posters. Essentially MCOB is about achieving balance and include risk warnings around debt consolidation etc. APR is also a way consumers can compare products and achieving clarity for multi rate mortgages and explaining early repayment charges is essential. Standard terminology with consistent terms is expected so as not to cause confusion. Brokers in particular seem to have problems with using risk warnings.
Equity release is seen as another high-risk area that is growing and impacting on vulnerable consumers. Sufficient prominence of the drawbacks and the adequacy and prominence of risk warnings is essential. The risks of negative equity, rolled up interest, impact on the value of the estate and reduction in state benefits are all risks FSA expect to see prominently displayed. Some firms have produced some very good factual aids on equity release but if they act as an inducement these also need to be clear, fair and not misleading and balanced.
On sub prime loans and debt consolidation there must be full fee disclosure and the APR 66% rule is something firms are struggling with. Intermediaries especially struggle with prominence and need to take care with internet promotions.
Newly authorised network have presented issues with appointed representatives promotions not being approved. Often adverts are submitted for approval but when sent back with amendments there is no audit trail to confirm the final advert was approved. Similar issues with mortgage brokers where out of date promotions exist especially websites and there are problems with claims of independence.
Venture Capital trusts are an emerging risk and targeting less wealthy audiences who are especially at risk. Balance and past performance not in its proper context with a lack of prominence of risks and cherry picking data is a frequent concern.
For General Insurance the risk assessment is based on complexity, product risk and market size with a focus again on the higher risks. Critical illness and premium protection insurance are proactive thematic work currently. With critical illness FSA have looked at 25 firms and found scare mongering and unsubstantiated claims with concerns equivalent to income protection. Very few terms and conditions are highlighted and pre-existing conditions exclusions and the impact of non-disclosure is not prominent enough. Premiums should also be representative and a prominent statement to demonstrate what that means. They have regular complaints about premiums when they are only an estimate and dependent on circumstances.
Headline claims are not acceptable with small print and tables used must be recent and relevant. Showing the lowest possible premium is not acceptable and presents an artificial picture. Firms should not just pick an artificial premium and it must be representative in some way.
The COB rules are a series of bolt-ons over the years and need to be revisited. FSA want to design the ideal regime and then see if it complies with MIFID requirements. Moving away from specific product rules and checklists towards TCF behaviour. FSA will ask firms to explain why they feel they meet up to TCF expectations. The new rule changes however depend on EU negotiations and a CP is expected around the end of December but may be later.
Communications continue with a VCT statement and findings published and there is also a statement about co-branding. Mortgage and GI bulletins have been issued and targeted presentations to firms with encouragement to make use of the hotline. The priorities will be TCF, SYSC and making FSA easier to do business with. FSA will use enforcement tools to ensure marketing matches what the product delivers. Firms must keep an eye on the target audience for their promotions. It is not FSA’s role, however, to pre-vet.
A few questions followed:
When will firms be able to comment on the rules? FSA are consulting with trade bodies on the rules and firms have an opportunity to achieve a shared approach with ‘less rather than more’ being the emphasis.
There are technical areas that need to be regulated to avoid a free for all and should either be retained in the rules or as guidance? This is something for the consultation and subject to MIFID requirements or will be put out as guidance to achieve consistency.
Has the FSA business plan been a success? They have seen improvements in controls and greater clarity of understanding by firms.
Mike Cowie then continued with a review of regulatory developments and their impact on L&G.
There are many ways to skin a cat and regulatory developments is certainly a full time job. The Simplified Prospectus (SP) comes in on 1 October along with CIS disclosures to the new SP regime. The IMA has been very useful. SPs are available and a full SP offered in all advertisements. The transitional for depolarisation run out soon. CFPPM is another area occupying considerable time.
Civil Partnerships whilst not an FSA requirement is nevertheless taking up a lot of time. A large amount of work is necessary e.g. quotations that do not give the right numbers, joint life single sex quotes, joint annuities (systems couldn’t cope two Misters). Application forms also need to change and there are innumerable variations. Letters that can cope with anything other than dear sir/madam and websites all need changing. Implementation is impacted by inflexible systems, attitudes and reputational risks.
Regulatory reporting and identified advised and non-advised business from April 2006 is a real challenge especially for business through IFAs. Can they rely on IFAs to tick the right box? Can they assume all direct business is non-advised? L&G have to assume it is.
Pensions simplification requires a vast amount to work it out and L&G have opened an office in Redhill to deal with it. It is not simple and like the mountain goat, firefly, silk work and Bombay duck none are quite what they seem.
The financial promotions order exemption for employers is good news and helpful. This should help to expand the provision of workplace advice and pensions sales.
Website accessibility is another thorny issue. Most providers do not comply with the requirements and there is a conflict between FSA rules and accessibility requirements e.g. risk warning locations and hyperlinks that conflict with the requirement not to hide risk warnings away.
Looking forward the quick guide is still open to consultation (31 October) and the product disclosure saga continues until April 2007. MIFID should reach level 2 formal proposals by 31 October. Assessing suitability and gathering information about clients to whom you promote your products is a challenge. Websites may be fine but if you issue the promotion the horrible impact on direct marketing could occur.
The FSA handbook review and the move to principle based regulation and high-level standards raises the issue of how senior management will react to principle based rules. It is likely existing checklists will remain useful and it is crazy to through out the baby with the bathwater. There may be guidance that becomes like rules and some firms could take advantage. It is more about moving away from the checklist mentality than checklists themselves.
Raising standards and research into pre and post sale literature to ensure the appropriate language is used for your target market and the nature of the commitment and risks must be fully explained. Trying to express the commitment required is a challenge and an area where guidance would be useful.
COB 3.8.4 requires firms to take reasonable steps to ensure they are clear, fair and not misleading. Complaints data, research and other MI is necessary to comply with that rule. Processes to measure consistency and an audit trail with quality sampling plus a process for what happens when you get it wrong are essential. Training and competence can do quite a lot, as your financial promotions approvers are a valuable resource that can expose the firm to horrible risk so should be treated nicely. Find out what motivates them. A common thread is that they regard themselves as technical experts and this should not be taken away from them. Input from legal and technical with a risk-based approach including second checks on new products are essential.
Your advertising approvals process needs to incorporate the input to the process of impact of regulatory developments; regular review and staff job descriptions with clear advertising files and details of regular sampling. Partner relationships are tricky as the relationship changes with depolarisation approvals of literature and positions of product branding makes the directly authorised intermediary responsible for the final promotion whilst the provider tries to ensure some protection of its brand.
Co-branding has caused quite a headache in ensuring the distributor brand is prominent, which is particularly complex with fund supermarkets.
MIFID is by no means the least of their problems with its initial views on an independent compliance function and a compliance operation process. This would mean advertising approvals might not be part of compliance but within a business standards function.
There followed a fascinating case study where 14 key points were highlighted in what looked like a fairly innocuous mortgage advertisement but Stephen Tearle very cleverly introduced a whole range of potential breaches for the audience to discover.
We are now truly the South West and Wales region and especially welcome our friends from South Wales where the financial services industry continues to flourish.
Anthony Smith FCoI