FSA fines DBS 100,000 for misleading advertising

Carol Sergeant, FSA Managing Director said:

"This is the FSAs first fine for misleading advertising. We require financial advertisements to be clear, fair and not misleading. The direct offer advertisement for Protected ISAs that was approved by DBS did not come close to meeting this standard."

"The fine would have been much higher if DBS had not fully co-operated with us by overhauling its advertising approval procedures and offering the 455 investors who responded to the advertisement their money back."

In June 2001 DBS approved Protected ISAs, a 24 page colour brochure distributed as a supplement with four and a half million copies of national newspapers. This complicated product had many unusual features that would have been unfamiliar to readers of those newspapers. DBS should have ensured that the advertisement would be understood by its likely audience and also that it presented a balanced picture of the investment and the risks involved.

However, the advertisement made misleading claims about:

• the nature of the investment, indicating that it provided 100% capital security over 5 years. However, this only applied at the fifth anniversary of the plan.

• the charges, promising All at no initial charge on the front cover of the brochure. However, there was an initial charge of up to 6% and an annual management charge of up to 1.2% per annum was levied by the manager of each of the underlying funds. In total the charges amounted to a 4.8% reduction in yield per year.

• the growth of the product and the price of protection. The advertisement clearly indicated that protected funds are related to six of the most popular ISA funds available. In fact investors received the average daily price during the five-year investment period, not the full growth of those selected funds. It failed to explain that the effect of averaging meant that investors would receive substantially reduced returns compared with unprotected funds.

• future growth, based on two examples assuming 14.4% and 22.9% growth per year respectively. These projections did not take into account the effect of averaged returns and were substantially in excess of the growth rates that were allowed to be assumed for ISA type investments.

Inadequate procedures

DBSs procedures for approving advertising material were inadequate. When the Protected ISAs advertisement was approved in June 2001, the advertising officer was not qualified to do the job and was unfamiliar with the product. There were also no procedures in place to ensure that, where an advertisement had been rejected by the advertising officer and then resubmitted, that the officer then reassessed the whole advertisement prior to final approval.

In addition, DBS had failed to follow instructions to improve its advertising approval procedures, following a previous visit by the regulator in March 2000.

Since the breach occurred DBS has been acquired by Misys Life and Pensions (a subsidiary of Misys PLC) the controller of 5 IFA Networks. The senior management in place at the time of the breach of the rules are no longer connected with DBS and extensive action has been taken to ensure that the appropriate systems and controls are now in place for approving advertisements.

Notes for editors

1. The penalty was imposed pursuant to Section 206 Financial Services and Markets Act 2000 in respect of breaches by DBS of PIA Rules 4.1, 7.1.2, 7.1.5, Adopted FIMBRA Rules F.18.3, F18.7(1), F18.10, F18.11.3(1), Table F18B, and F29.8.3(1) and SIB Principle 9. The Final Notice, which provides full details of the case and the steps taken by the firm to address the concerns raised, may be found at http://www.fsa.gov.uk/pubs/final/index-2003.html.

2. Earlier this year, the FSA called on consumers to help it clamp down on financial advertising by sending in examples of advertising that they think are misleading. For more details see http://www.fsa.gov.uk/pages/library/communication/pr/2003/002.shtml.

3. A PDF version of the Protected ISAs brochure is available from the FSA Press Office.

4. DBSs compliance procedures and controls were ineffective between 2000 and 2001 because:

   • Where an advertisement was rejected and subsequently resubmitted, a reassessment of the whole advertisement did not take place prior to final approval.

   • The procedures were unclear about how difficult or complicated advertisements were to be referred to a higher level of authority.

   • The Advertising Officer was not required to record the grounds on which they believed each advertisement to be fair, accurate and not misleading.

   • The Advertising Officer did not hold the status of a fully qualified financial adviser as required by PIA Rules.

   • No on-going training was provided to the Advertising Officer in order for that person to maintain appropriate levels of current expertise in relation to new products or products not previously encountered. The Advertising Officer was unfamiliar with Protected ISAs.

   • There were no formal arrangements in place whereby additional resource was available to assist the Advertising Officer.

   DBS also received a PIA Supervision visit in March 2000 when concerns regarding DBS's advertising approval procedures were identified. The remedial action specified a requirement for DBS to improve its procedures. Whilst DBS made some changes to its compliance procedures it did not make any changes to its advertising approval procedures and the limited changes were neither adequate nor a sufficiently permanent responses to the problems detected at the Supervision visit.

5. The failings in this case merit a significant penalty. In fixing the amount of such penalty, however, the FSA has recognised that the impact, actual and potential, of these failings has been substantially mitigated by the extensive and proactive remedial action undertaken by DBS. In particular:

   • Since the misleading advertisement was issued, DBS has been acquired by Misys Life and Pensions (Misys) a subsidiary of Misys plc. Misys has taken action aimed at improving quality standards at DBS. DBS has invested substantially in improved compliance procedures, particularly with regard to supervision and technology. None of the individuals in control functions at DBS in June and July 2001 at the time the misleading advertisement was issued remain in these positions.

   • DBS has proactively reviewed its internal procedures relating to advertising approval.

   • DBS has increased the human resource available for advertising approval by the creation of a central team (for networks within the Misys Group).

   • DBS has taken remedial action to advise customers that responded to the advertisement of the failings and to make arrangements to offer redress. Where customers consider that they were mis-lead contributions have been returned.

   • DBS has been open and cooperative with the FSA during the investigation. Its approach and its proactivity in identifying investors and arranging for refunds to be made has ensured that consumers have received redress in a timely and effective fashion.

   Nevertheless, while recognising the steps taken by DBS to remedy the problems and its commitment to resolve the issues arising, the FSA notes that the full co-operation given by DBS has been largely in response to the regulators actions and instigation.

6. The direct offer advertisement had been issued by Ensuredirect.com Ltd, an appointed representative of DBS. It was DBSs responsibility to approve the advertisement.

7. 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; the appropriate degree of protection of consumers; and fighting financial crime.

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