Watchdog sets out new approach to regulating financial ads

The FSA will improve understanding of advertising standards by publishing regular bulletins for consumers on its monitoring work and will set up a hotline for consumers to report advertisements that they believe to be misleading. The FSA is also reminding firms that they are responsible for ensuring that their advertisements are clear, fair and not misleading and must present a balanced picture of a product. Vitally, the key risks of a product should be set out alongside its benefits, not buried in the small print.

The proposals on the use of information on past performance form the second phase of action being taken in response to recommendations for change made by the Past Performance Task Force last September.

The retail financial services sector spent 1.4 billion on advertising and promotion last year, reaching 38 million consumers via TV, 38 million by post and 27 million through advertising in newspapers. FSA research shows that financial promotions for investment products play a significant role in consumers decision making process, although this is often in combination with other information sources. Advertisements can condition expectations, whether or not consumers are looking to buy a product.

Christine Farnish, FSA Consumer Director, said:

"Most firms do adhere to the spirit of our rules. But current market conditions put the spotlight on three areas that need particular attention. They are: a lack of balance between the benefits and drawbacks of a product; claims that can lead to unrealistic expectations; and key information that gets buried in the small print. Our research shows that most consumers dont read the small print.

Our proposals on past performance are designed to ensure that such figures are not viewed in isolation but considered alongside other important factors, such as flexibility, charges and investment strategy.

We are also progressing work to develop a standardised way to present past performance, which could be introduced in the future."

The FSA will:

• improve understanding of its advertising standards with the publication of regular consumer bulletins covering topical issues and anonymised case studies and the production of quarterly advertising statistics giving details of FSA monitoring activity;
  

• set up a hotline to encourage consumers to call the FSA when they spot an advertisement or marketing brochure that they think is misleading;
  

• focus its monitoring on hotspots, which will, where necessary, lead to the FSA taking enforcement action; and
  

• review the effectiveness of these measures after two years.

The main proposals in CP132 are:

• past performance should no longer be the predominant message in an advertisement;
  

• past performance should not be presented in any way that links it to the future performance of a product;
  

• the past performance warning should be included in the main text of the advertisement, not buried in the small print;
  

• the use of hypothetical past performance should be significantly restricted;
  

• advertisements for bond funds that include information on yields should contain both the income and the redemption yield so that consumers gain a balanced impression of the short and long-term prospects for the fund.
  

Notes for editors

1. Policy Report on the FSAs Regulatory Approach to Financial Promotions and CP 132 on the Presentation of Past Performance and Bond Fund Yields in Financial Promotions can be found at www.fsa.gov.uk.

2. Closing date for CP 132 is 3 July 2002.

3. See Press Notice 126/2001 at www.fsa.gov.uk for the FSAs response to recommendations for change made by the Past Performance Task Force in September 2001. Work is in hand on the third course of action to consider whether it is possible to standardise the presentation of information about past performance, price and risk.

4. See Appendix 3 of the Financial Promotions Policy Report for a summary of the consumer research. IFF Research Ltd. conducted 103 in-depth, face-to- face interviews for a programme of qualitative consumer research for the FSA.

5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.

6. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.