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Case Study 1: High-level communication rules - image advertisements, the average member of the group, accuracy and reference to risks, use of jargon

The example promotion included in this case study is not meant to be copied as an example of good practice. Indeed, it may contain defects other than those identified.

Background

This example promotion is for 'Fluency', a new open-ended investment company (OEIC) fund in the European (non-UK) sector marketed by MPBR Asset Management (MPBR). It is the first stage of a marketing campaign and has been designed to go on billboards at outdoor sites at train, coach, and tube stations, and at airports. In its creative execution, MPBR has tried to follow the new principles-based approach in COBS.

In terms of market segmentation, MPBR has identified several classifications for the population at large which it considers will find this fund attractive. It has chosen to focus on 'Mid-Life Affluents' and the firm has tried to make the marketing campaign attractive to this audience. The campaign concept aims to demystify non-UK investments, and is designed to appeal to an older, more sophisticated customer.

Image advertisements

Often the first promotion in a series of promotions will be an 'image advertisement' that is exempt from most of the financial promotion rules. However, this financial promotion mentions a specific product and includes detail on its benefits. For these two reasons this cannot be treated as an image advertisement.

Average member of the group

If no exemption applies the high-level requirements in the new rulebook will be relevant, and one of these requires that promotions should be presented in a way that is likely to be understood by the average member of the group to whom they are directed.

COBS 4.5.2R(3)

A firm must ensure that information is sufficient for, and presented in a way that is likely to be understood by, the average member of the group to whom it is directed, or by whom it is likely to be received.

Firms are expected to adopt a common-sense approach to the content of the promotion. Questions firms may ask themselves include:

• Who has the product been designed for?
• Is the marketing directed at that group?
• What is that group's financial capability?
• Do they hold existing investments in this product?
• Is the promotion sent to them exclusively or will other consumers see it?
• Is the advertising medium used suitable and does it allow the product to be appropriately targeted?

Here MPBR's promotion tries to tie the marketing concept with the product and the audience. The language used is suitable for an educated market with some financial capability. But the promotion is on a billboard so it will not be seen by this group exclusively. If a product is only suitable for professional clients or financially sophisticated retail clients, it is unlikely that a billboard will be appropriate. However, as the promotion is a high-level advertisement that only seeks to attract further investigation, it is unlikely to lead to retail consumer detriment at this stage. If the promotion was to go into more detail about the product then we would expect the firm to carefully consider the content given the general nature of the media being used.

For more information on content, please also see the Q&A on average member of the group.

Accuracy and reference to risks

COBS 4.5.2R(2)

A firm must ensure that information is accurate and in particular does not emphasise any potential benefits of relevant business or a relevant investment without also giving a fair and prominent indication of any relevant risks;

This is another high-level rule that firms should consider when looking at this type of early promotion. What do concepts like accuracy and fair and prominent description of the risks mean in terms of this promotion?

The promotion is drafted in high-level terms and does not go into specific plan features. But it does more than announce the fund; it lists some of the high-level benefits, and fails to mention any of the risks.

Firms are expected to produce promotions that are balanced in terms of how they express the benefits and risks of a product. It appears MPBR may think that including risk warnings at this early stage would send the wrong message and may believe that it is sufficient to provide risk information later in the marketing/sales process. This is a mistake. Although the new rules do provide flexibility for firms to decide how to express risks, each promotion must itself be stand-alone compliant and balanced.

The reference to benefits in this promotion triggers the need for a fair and prominent indication of the product risks. We would expect the presentation of risks to balance the presentation of the benefits. If benefits are discussed at length and in large typeface, it is not fair to discuss risks in brief and in the small print.

Here, for example, it may have been appropriate for MPBR to include a warning that the product is a European equity fund and, as such, is subject to the fluctuations of the equities in which it invests. We would not accept a statement that 'risks apply to this product, please see the relevant page of the product information leaflet' as being a fair or prominent indication of relevant risks. It would also be inappropriate to refer clients to another document for information about risks unless the benefits were dealt with in a similar manner.

To determine which risks should be covered in such a promotion MPBR might have found it helpful to ask itself the following questions:

• What are the risks?
• In how much detail are the benefits described and what risks would we need to describe to ensure that the promotion is balanced?
• How prominently are the benefits displayed, and are the risks displayed with equal prominence?

Ultimately, consumers need to read, understand and act on information given. Firms must use warnings and realise that such warnings lose their impact if they over-indulge in clichés or fail to put them in a prominent position.

Use of jargon - if a promotion describes benefits with terms like 'Euro-savvy', 'Protected booster' and 'specialises in the growth potential of Europe' the firm should ask itself whether such terms will mean the same to one consumer as to another. In using such language or ambiguous terminology the firm may not meet the fair, clear and not misleading test. Firms should be concerned with the accuracy of information and it would be hard to tell whether an accurate impression is gained from this language.