Financial Promotions and More Principles-Based Regulation - Freedom and Responsibility
Speech by Tony Katz, Manager, Financial Promotions Team
Marketing Financial Forum, Chepstow
28 November 2007
Good afternoon.
I have been asked to come and talk to you today about the FSA's approach to supervising financial promotions under more principles-based requirements.
At the end of this presentation, I hope you will walk out with two key impressions:
Key impressions
- The FSA's move to more principles-based regulation represents a fantastic opportunity for innovation in advertising. Gone are many of the detailed and prescriptive rules. In its place we have requirements which focus on principles and high level requirements. So for example, you are now no longer tied down to prescribed wording to describe risks. The canvas is yours with no constraints on the creative process as long as you are producing a fair outcome for consumers;
- With the greater power to innovate comes greater responsibility – responsibility for firms and in particular senior management to ensure that firms have the appropriate culture, systems and controls to achieve the right outcomes. There needs to be the right relationship between all those involved in delivering clear and fair promotions for consumers – including the people responsible for the creatives, marketing and compliance.
Principles-based regulation
Too much tick-box compliance
Our previous detailed rules at times served as a bar to firms producing outcome-focused promotions. In some cases, they resulted in too much 'tick-box' compliance where risk warnings were included but failed to make the promotion clear, meaningful or persuasive for the consumer.
Take, for example, advertisements we would regularly see in the national press:
- past performance warnings in advertisements which do not refer to the firm's performance;
- warnings that "you may not get back the amount you originally invested", even where the capital is guaranteed; or
- automatically including "the value of your investment can fall as well as rise" without considering whether the risk warning is needed in the circumstances, or whether there is a clearer way to explain the particular risks that apply to the product in question.
Tick-box compliance doesn’t go far enough to putting the firm in the shoes of the consumer. It doesn't ensure that the right outcomes are achieved (fair, clear and not misleading promotions) because the focus tends to be with procedures rather than outcomes.
Fair, clear and not misleading supported by high level requirements
We have removed much of the detailed rules from the investment conduct of business sourcebook since 1 November this year.
Importantly, what remains at the heart of the requirements for financial promotions is the overarching responsibility to ensure that financial advertising is 'fair, clear and not misleading.'
This overarching requirement is supported by a series of high level requirements which expand on the meaning of fair, clear and not misleading:
- communications must be accurate and sufficient for their purpose;
- they must be presented in a way that is likely to be understood by the average member of the group to whom they are directed;
- there is a fair and prominent indication of relevant risks where benefits are highlighted; and
- important items, statements or warnings must not be disguised or diminished.
Some detail remains where necessary to achieve the desired regulatory outcome. For example:
- We have detailed rules in relation to the use of past performance information in order to prevent, for example, misleading consumers through cherry picking favourable information and giving the impression that past performance is a reliable indicator of future results.
- We have additional requirements where the promotion is a direct offer, where the consumer may proceed to invest in response to the promotion. While we have retained the additional requirements we have introduced greater flexibility as to when such additional information is given to the consumer. The required information can now be provided in a separate document provided it is given to the consumer in good time before they respond and as long as the consumer refers to it before responding.
More principles-based regulation means being clear about the regulatory outcomes we want and marshalling our supervision and enforcement efforts to ensure those outcomes are achieved.
This is the strategic direction that we are convinced is necessary in order to deliver our statutory responsibilities, while at the same time keeping pace with the dynamics of the financial services market and fostering the innovation and competition that make markets successful.
The FSA is committing itself to this approach because we believe it puts us in a position to improve the way we discharge our duties. We think that a more principles-based approach is more likely to deliver orderly and efficient markets alongside balanced and proportionate consumer protection.
Advantages for firms
There are distinct advantages for you.
- firms can be more creative - so long as their promotions achieve the end outcome of enabling consumers to make informed decisions and are fair, clear and not misleading;
- it should free firms to produce differentiated and more targeted promotions. For example, when dealing with sophisticated investors you can use more sophisticated language in your promotions. Advertisements directed at the general public should be simple to understand; and
- risks and drawbacks should not be included in a standard rote manner, but presented in a manner most likely to be understood by the audience. This may mean firms refreshing the wording of their risks from time to time!
Critically, you need to be asking:
'Who is the consumer and what will they understand from my promotion?'
What are firms doing with the added flexibility?
We have looked at firms' promotions in the national media since 1 November to see how firms have reacted to more principles-based requirements.
- what we are seeing is a step change, not a 'big bang;'
- a number of firms have decided to take advantage of the flexibility the new requirements offer them by, for example, no longer using stock standard risk warnings "investments can go down as well as up" but issuing promotions with risk information that is more tailored to the customer and product;
- some firms are differentiating between their more detailed promotions (which are balanced with risks as well as benefits) and their brand advertising (which includes neither risks nor benefits).
We will lend assistance where we can to help firms understand the new requirements – in particular what is meant by balance, target audience and appropriateness, direct offer promotions and the new past performance information requirements.
Some misconceptions
Misconception 1:
'The greater flexibility means a lowering of standards.'
Please note that more principles-based regulation isn't about lowering standards, its about affording firms greater flexibility but also requiring firms to improve outcomes for consumers by producing clearer and fairer promotions which are better tailored to consumers' needs.
Misconception 2:
'As the fair, clear and not misleading rule remains unchanged, I don't need to take any action whatsoever?'
No. Every firm must satisfy itself that it is acting in accordance with the new requirements. Each firm needs to be able to satisfy itself that it is achieving the right outcomes (fair, clear and not misleading promotions).
Misconception 3:
'I don't need to include details of risks in the promotion - I can say something at the end of the sales process.'
Promotions should be standalone compliant. However, what risk information you include at a given point in the process will depend on whether the promotion describes any benefits of the product, the nature of the product, target market, media used and where in the sales process the promotion falls. At each stage of the sales process, the consumer needs to receive a fair and balanced interpretation of the product.
Treating customers fairly
Clear communications
Clear communications are a key component of how firms apply our overarching 'treating customer fairly' objective in practice.
Providing fair, clear and not misleading information to customers is a very visible means by which we can assess whether:
- products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly;
- consumers are provided with clear information and are kept informed before, during and after the point of sale; and
- the product performs as advertised and expected.
Cultural issues
We think firms are less likely to achieve the above when cultural issues 'hold them back.' The key cultural issue we have identified for financial promotions is the relationship between marketing and compliance teams. We think that lack of collaboration can prevent both sides from delivering fair outcomes for consumers.
Senior management in your firm (this includes in marketing and compliance) need to be satisfied that the relationship between compliance and marketing is working well – and is conducive to making fair, clear and not misleading promotions. There are benefits here for firms as well as consumers. Months of work by marketing being undone at a stroke of a compliance officer's pen when the ad eventually reaches them, cannot be the most effective way to run a business.
Here are some questions you could ask to test whether the current relationship between marketing and compliance works well:
- is compliance engaged early enough in the product design/marketing process?
- do marketing and compliance have the same understanding or interpretation of the product and how it operates? Does marketing know enough about how the firm is expected to satisfy the fair, clear and not misleading requirement? Do your compliance colleagues support you sufficiently in this?
- what role does your advertising agency play in issuing fair, clear and not misleading promotions? Do they have the necessary expertise?
- are the right people being recruited? Are they receiving the necessary training?
Tug of war
In our experience, many firms still face a 'tug of war' between marketing and compliance. It is difficult to see how marketing and product design can achieve clear and fair promotions if they don't work collaboratively and block rather than assist each other. We think expertise needs to be shared from the outset. Senior management at your firm is best placed (and has the responsibility) to decide what processes and controls are most appropriate for their business.
Management information
Some deadlines
We want to see consistent fair treatment of customers by all firms by the end of December 2008.
By March 2008 firms are expected to have appropriate management information or measures in place to test whether they are treating their customers fairly.
Some questions you can ask yourself
We think marketing departments need to think carefully and document the rationale for each sales campaign, to ensure that you are confident that your promotions enable consumers to make informed decisions.
There are some key questions that we think most firms should be asking. They are:
- who is the target market and what is their level of financial understanding?
- which choice of media is appropriate?
- which benefits do I want to highlight and which risk information do I need to include, to give a balanced impression?
- why aren't enquiries leading to sales?
- why do consumers not proceed with a sale after receiving advice?
- persistency levels - why aren't customers holding onto the investment to its term?
- is the product delivering as it was advertised?
- what is our complaints record? What feedback are we getting from customers, not only as registered, but dissatisfaction that may be voiced to sales staff?
Sales volume data is unlikely to present you with enough information to act as an early warning system – we think your firm needs to be monitoring other indicators like complaints and pre-testing data, to give you warning of deficiencies in the marketing and selling process that might lead to customers being treated unfairly.
In line with our principles-based approach, we are not setting a prescriptive format here for what management information is required – firms need to judge for themselves what they need. The questions you should ask yourself will depend on the nature of the firm and its business.
Regulation in practice
At previous marketing forums, it was interesting to hear that much of the discussion on the requirements for financial services focused on the requirements of the Advertising Standards Authority (ASA). It might be helpful at this point if I outline the roles of the different regulators in respect of financial advertising regulation.
The FSA, Office of Fair Trading (OFT) and ASA each have powers in relation to financial advertising.
ASA
The ASA is the independent body set up by the advertising industry to police the rules laid down in its advertising codes for both broadcast and non-broadcast advertising.
In relation to financial advertising in non-broadcast media, the ASA considers complaints about advertising where the concern is a matter of harm or offence or where concerns relate to non-financial claims in advertising. Outside these areas, the ASA either passes its complaints in respect of non-broadcast material to the FSA to consider or advises the complainant to contact their local Trading Standards Department if it is a matter of consumer credit.
OFT
The OFT regulates advertisements for consumer credit. The FSA regulates promotions for qualifying credit i.e. mortgages.
Some firms advertise consumer credit and qualifying credit in the one advertisement. They are then subject to two sets of advertising regulation. We are working with the OFT to tackle these overlaps in regulatory requirements. We hope that working together we can reduce the regulatory burden for firms, achieve a consistency of approach and increase the clarity of promotions for consumers.
While solutions may take time to implement, we are making a difference in the meantime by making immediate changes as appropriate, as we did last year with a risk warning amendment (which eliminated the need for advertisements to include two very similar risk warnings).
FSA
The FSA, established under the Financial Services and Markets Act 2000, is the primary financial regulator in the UK.
You may already be aware that my team has a proactive approach to supervision and regulation. We swiftly contact firms whose advertising is (in our view) unfair, unclear or misleading– in particular high risk products or practices. The outcome can be informal resolution of the complaint or, on occasion, our investigations result in formal enforcement action for the firm.
In addition to working with firms one on one, we often conduct thematic investigations to identify whether there are wider market issues and, if so, how serious that issue is.
We aim to be proportionate and risk-based in our dealings with you. Our monitoring is closely aligned to the structure of the sector and the risks each media poses. It includes direct mail, TV, internet-based advertising and the press. On average we consider 480 new press advertisements each month. In addition we consider complaints from consumers and firms – we receive about 70 calls each month to our hotline.
Repeat issues
I want to mention key problem areas that crop up time and again that we are particularly focusing on. These are:
- misleading headline claims;
- hiding key risk information in small print;
- inadequate product explanation; and
- where promotions state the benefits, a failure to balance this information with a sufficiently prominent explanation of the key risks.
To illustrate these:
- we have seen general insurance adverts that promise to save you hundreds of pounds but in reality the people who respond save less than the amount stated;
- We recently fined a mortgage broker, Select Mortgage Services (Select), for reasons including that its promotions did not accurately describe its "Capital Repayment Plan" (which was based on an interest-only mortgage), meaning that customers did not receive reliable information to help them make informed choices; and
- We have seen promotions describing a life insurance policy as a funeral plan when this was not the case.
With these promotions we do not consider that consumers are able to make informed decisions.
Key themes going forward
Internet project
We have just completed a review of internet financial promotions.
The internet matters to us because of its rapid growth as an advertising medium and because of its immediacy and ability to link online advertising to online direct sales.
We have published a communication following a 12 month review of financial promotions on the internet. We found that:
- 25% of the websites we reviewed did not meet our financial promotions requirements;
- The problems we saw were that firms are not placing enough emphasis on customer journey and website design when placing key information. In some instances general website maintenance was lacking, resulting in out-of-date or incorrect information provided.
We are asking firms to take immediate steps to improve their websites. The FSA will be carrying out a further review in March 2008. We have also published good and bad practice examples on our website to help firms understand what is expected of them.
General insurance savings claims
I would like to briefly summarise our work in respect of general insurance savings claims. In order for promotions to be clear, fair and not misleading, there should be no mismatch between the general impression created by the promotion and the experience the consumer has when responding to the promotion. We have been pleased to see an overall improvement of general insurance advertising in the national press, but expect the messages to be applied to all other media such as internet and outdoor advertising.
Challenges for us
Challenges lie ahead. We have seen improvements in standards – for example in the national press deficient promotions are now down to less than 24%. However, firms need to raise and maintain standards.
The challenge for us is to help firms understand what is expected of them under more principles-based regulation and the new investment sourcebook. We will help by continuing to set out the issues that prompt us to ask firms to amend or withdraw their promotions. We have posted case studies and Q&As on our website, setting out our expectations. We continue to speak at conferences and events. Industry training on the new rules is available from us in the first quarter of next year.
Useful links
Financial Promotions Team web pages
Conclusions
What key messages do I want you to take away with you going forward?
Key messages
- Principles-based regulation means a focus on outcomes
Firms need to look at their financial promotions holistically based on outcomes – are they achieving the right outcome for consumers – promotions which are fair, clear and not misleading and which are tailored to the needs of the target audience?
- Greater flexibility means additional responsibility
30% of people in the financial services workforce are marketing or client-facing professionals. Clearly, without you, products wouldn't get sold and consumers wouldn't understand them. You get consumers to engage. That power carries with it a great deal of responsibility.
- Firms cannot afford to be complacent
Everyone should be questioning what changes need to be made to achieve the outcome of fair, clear and not misleading communications. Ensuring that appropriate systems and controls are in place is the primary challenge for senior management.
We think you can get there by refining your systems and controls, your use of MI and your relationship with other functions in the business.
Best of luck to you all in producing persuasive promotions which achieve fair outcomes for consumers.