Case Study 3: Fluency's direct offer financial promotion
Case study 3: Direct offer financial promotions - timing of product disclosure, information that needs to be disclosed, and financial promotion aspects of the appropriateness test.
The example promotion included in this case study is not meant to be copied as an example of good practice. It may have defects other than those identified.
Background
Here, we look at some of the practical implications of the new rules on direct offer financial promotions. These include rules about specific information that should be disclosed and the timing of that disclosure. Please also see the Q&A text on the requirements for direct offer financial promotions.
In this promotion, the third stage of this campaign, MPBR adds contact details for consumers so they can obtain more information and invest. This promotion is published in the broadsheet press and builds on the themes that consumers in the target market may recognise from the earlier promotions.
| Direct offer financial promotion | a financial promotion that contains:
and which specifies the manner of response or includes a form by which any response may be made. In relation to MiFID or equivalent third country business "controlled agreement" includes an agreement to carry on an ancillary service. |
| COBS 4.7.1 R(1) | A firm must ensure that a direct offer financial promotion that is addressed to, or disseminated in such a way that it is likely to be received by, a retail client contains:
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| COBS 4.7.1 R (2) | This rule does not require the information in (1) to be included in a direct offer financial promotion if, in order to respond to an offer or invitation contained in it, the retail client must refer to another document or documents, which, alone or in combination, contain that information. |
Is this a direct offer financial promotion?
The promotion invites the reader to make an offer to invest and, by referring the client to a website or phone number for an application pack, it specifies the means of response. As such, it satisfies the criteria to be a 'direct offer financial promotion', a term which has wider applicability than that understood historically by some firms.
When information must be disclosed and where
Before 1 November 2007, a firm would be expected to include all relevant information in every direct offer financial promotion that would have included an application pack. However, this promotion clearly envisages a later communication from the firm – either on the website or in the application pack – in which that information must be provided before the transaction is concluded.
The rule COBS 4.7.1R(2) relating to the timing of information disclosure in direct offer financial promotions provides flexibility and allows firms to refer retail clients to another document or documents that contains the required information.
It is worth considering how much 'timing' flexibility actually exists. When could MPBR supply the information to its clients? For example, is it possible to provide the information before the promotion?
Consider this example: a client takes out an ISA with MPBR, investing in their European Fluency Fund, in November 2007. They invest £5,000, leaving some of their ISA allowance for the tax-year still available. The client applies by completing an application form in the pack sent to them when they requested it by email from MPBR's website. That pack contains the Key Features Document. Later in the same tax-year, MPBR sends out a new direct offer financial promotion to all clients with headroom in their current year's ISA. MPBR does not need to re-send the KFD if satisfied that the client must refer to the document that contains the necessary information before responding to the follow-up direct offer financial promotion.
Where information is disclosed in a document other than the direct offer itself, the rules demand that the client 'must refer' to the information in order to respond to an offer or invitation. It is not enough that the client has simply received it earlier or that it is available to them in a general sense.
So, how can MPBR ensure that the customer has indeed 'referred to' an earlier document? It could, for example, warn the consumer that they must refer to the earlier documents and ask the consumer to sign a form to confirm that they have done so. The firm could also point the consumer to a website or a helpline where they could order or access the relevant document and require them to confirm that they have read it. This would help the firm demonstrate that the client has referred to the required information before responding.
But, say MPBR had a client who invested five years ago into an ISA. Would it be acceptable for the firm to assume that the client can rely on information from five years ago? If it did, would MPBR be treating that client fairly? If the consumer was able to refer to earlier disclosure documents which had the correct information then the firm would meet the rules. However, in practice, if firms provide documents so early in the process that there is a good chance consumers will have forgotten or lost them, this approach is unlikely to be acceptable.
The information disclosure could also come in other promotions in an advertising chain that lead up to the sale. Again, firms need to find a way to ensure that the client must refer to that information before responding to the offer or invitation.
Of course, firms still have the option to send out full product information with every application form.
Indeed, if a direct mailing application pack is sent out there may be no real change in practice under the pre- and post- 1 November regimes. For example, if there was no chain of communications and the only contact from a firm to a potential client is in a direct mail application pack that it sends out speculatively. This is the first and final communication from the firm to the client before the client is able to apply and the direct offer pack must include all the disclosures.
MPBR will also need to comply with COBS 5, which deals with distance marketing requirements.