On a sunny afternoon in Cardiff we were very pleased to welcome Paul Jennings Senior Associate FSA Financial Promotions, Linda Bevin Technical Training Manager Legal & General and Anthony Smith Compliance Manager Clerical Medical. Although a departure from our regular venues in Bristol a large audience braved the journey across the Severn to take part in another lively and informative event organised by the South West Committee. Our thanks go to Legal & General for sponsoring the event.

Paul Jennings began by bringing us up to date with some of the changes within FSA Financial Promotions and an overview of where they are going. Essentially the focus is on obtaining a balanced approach in financial promotions. Simply putting a negative against every positive is not the correct definition of this approach as some products may have more positive aspects, however, any negatives must be given due prominence. In particular many product teasers need to be just as balanced in their approach giving equal prominence and putting any draw backs up front. In particular with newsletters there is no point putting a list of warnings on page 17 when it is possible the consumer may never get to that page.

There are still firms who believe they don’t need to put warnings in the main body of the text which is a basic point outlined in FSA’s paper on financial promotions in April 2002 and is still relevant. A lack of balance is one of the biggest problems for example using headline rates or suggesting an 80% return when it would be virtually impossible to achieve this rate in most circumstances. Misleading claims normally made by omission and the continuing use of small print is a problem. Mortgage and general insurance promotions need to change. We really need to ask whether the small print is even necessary and review the use of legal and formulaic language that consumers do not understand.

John Tiner has put financial promotions as a top priority for FSA and devoted a huge budget towards supervision and enforcement. Everyone can have a bad day but where there is a series of correspondence with a firm over minor points it becomes a problem. Simply stating ‘I didn’t see that one’ is not good enough and indicative of a break down in systems and controls.

Treating customers fairly is important and systems and controls need to be in place to ensure this happens. Targeting consumers for a tranche of unsold business as a desperate sales pitch is likely get firms into trouble and they have to ask themselves whether this is fair to their customers. It is possible to be penalised for a breach of high-level principles, in not treating customers fairly, even if on the face of it the financial promotion may appear to be compliant.

Enforcement is a high priority with a number of sanctions available. People must understand the risks and remedial action can be very expensive e.g. reversing pensions unlocking cases. There are around nine firms in enforcement as well as a number of private warnings. Paul’s personal view is that private warnings effectively put firms in a ‘last chance saloon’ if they subsequently produce non-compliant material after a private warning enforcement may be the only option available.

There is a new financial promotions structure being formed from what was a small team to three departments. There will be a particular focus on direct offer financial promotions. The FSA are not against direct offer financial promotions if they are done well. Television advertising is another area to be targeted and monitored. There will also be more visits to firms, which is another area that could lead to enforcement. There is likely to be a review and remediation team with an extra 30 people carrying out similar monitoring role including reports from consumers and also competitors (most complaints come from competitor firms).

There is a communications strategy and a confidential letter has been issued to key niche players setting out FSA concerns. The FSA have also called in a group of firms to warn them of potential de-authorisation for misleading financial promotions.

SCARPs have been reviewed in CP188. This is a development in products that moved from precipice bonds in 1998 to the new income and growth bonds and also protected products and structured deposits. There is now a requirement to have periodic statements to enable customers to have a snapshot of where they are going. A structured deposit is a new development and FSA is very interested in these products, which have expanded FSA requirements on balance and past performance to banks and building societies. Counterparty risks must also be prominent to make promotions clear, fair and not misleading. Even if the counterparty is a triple ‘A’ firm it has to be made clear in the promotion that if they go into default the consumer may lose out. There is also a capital at risk fact sheet, which is designed for consumers and a helpful instrument for firms.

Mortgages are an area where there are high level principles that currently apply and FSA have already written to firms to warn them about taking a more balanced approach. If there are big benefits consumers need to know the drawbacks especially penalties which can be extreme. Plain and intelligible wording in a language the customer understands ties in with treating customers fairly. Disguising and burying facts in the small print does not meet the evidential requirements of the rules. Think carefully about the message to be conveyed not the legalistic language.

Similar requirements are set out in ICOB for general insurance. In particular firms must not assume consumer understanding and focus on treating customers fairly. If knowledge is expected this should be clearly stated and small print especially the use of ‘*’ is no good.

The key messages are that FSA senior management support these initiatives with increased resources. They will target prolific direct offer firms and continue with themed work, which is very effective. Systems and controls are just as important as the promotions themselves. Responsibility for sign off must be clear and training must be adequate. FSA do not provide a validation or approval service for firms but will give feedback on specific points only where a firm believes the material to be compliant and can explain why.

There have been a number of well-publicised enforcement actions and there will be more to come. It is better to get it right in the first place and firms should ensure they have adequate resources and a means to make their financial promotions compliant.

A question was raised about providing more detail in the handbook rather than having to rely on things like past papers from April 2002 or consultative papers. Paul pointed out that COBs 3 was fairly high level and the FSA approach is more principles based as products are constantly change e.g. the developments in structured deposits. The onus is on firms to meet the requirements. There is a move to reduce consultative papers. The April 2002 paper is the only one specific to financial promotions and much of its content is still relevant. Ultimately firms must adequately resource their approval teams to keep up to date and they should have enough people to make it happen. For example one firm had only two people to approve an average of 248 items a month, which was ridiculous. With another firm the FSA have made the CEO sign off all financial promotions to take personal responsibility as the only way to continue in business.

A question was raised about projection rates. The changes in the tax treatment of ISAs and falling markets have prompted concern. Ultimately firms must be clear and work is being done to consider this issue by FSA but we will have to wait and see what the impact is. This highlights the point about when to use the word tax-free. This may not be a problem provided the meaning of tax-free is explained.

Linda Bevin then went on to consider the new mortgage rules. These cover certain activities and some are not regulated like most buy-to-let schemes although some second mortgages are caught by the regulations. Nevertheless, all mortgages are caught by the “qualifying credit promotions” rules. , which These also apply to promotions where covering loans and mortgages are advertised together..

The main principle is to be clear, fair and not misleading. Comparative advertisements must ensure the comparison is fair and pick objective and relevant examples. If a special offer is being made the comparison must make clear it is a special offer and firms should never run down the competition.

Balancing the benefits against the disadvantages is important. Early repayment penalties or high mortgage to loan requirements must be given due prominence. The requirement for a typical example is gone. If figures such as a monthly repayment figure, or possible saving are shown but is replaced by the advertisers need to explain how the figures are calculated, which is close to a typical example. There should also be no false assertions about the size of the firm or the volume of credit available or any indication it is approved by FSA.

Promotions must state clearly if cash-backs need to be repaid on early redemption and penalties of all kinds must be up front. Any additional fees for non-standard services should be clearly indicated and certain phrases are not allowed such as interest free or overdraft (interest free can only be used where the loan and repayments match exactly). Plain language is also now an evidential provision, which is welcome, so there is a requirement to consider whether it would be understood by the average first time buyer. Words such as ‘subject to status’, ‘equity release’ may be familiar to us but would the general public understand them.

Conditional mortgages must make clear other products are required to be purchased such as insurance. There are also some new risk warnings, which update some of the warnings that are now stale and somewhat out of date. Consolidation loans also need the additional warning that people should think carefully before acting. Risk warnings should also stand alone and not be buried in the small print. APRs must be prominent and not bracketed and there is additional wording to show it is designed to provide a cost comparison of the loan.

Having the APR no less prominent is nothing new but there is the requirement to ensure it is typical which means at least 66% of borrowers must be able to obtain this rate or lower and the firm should be able to prove this is the case. If a new product is launched it would involve making estimates based on anticipated take up. Firms cannot state ‘from’ in front of the APR and should also confirm if the APR is variable. If fees are charged they need to indicate what this is likely to be in cash terms.

The FSA have also provided some very useful examples, which are very clean. It is a real opportunity for firms to start with a blank sheet of paper and ask themselves whether they need all this detail.

What followed was some serious audience participation with a series of four case studies taken from recent real life examples. Given the points made above they would be truly non-compliant with too much small print, a lack of balance and numerous technical breaches. The industry really does need to clean up its act if widespread enforcement action is not to follow.

We closed the day with a brief overview of the appropriate expertise necessary to approve financial promotions by Anthony Smith. Given the complexity of the rules and need for balance, treating customers fairly plus the ever present supervision of FSA this may be a tall order. There is clearly a need to go beyond just the basic rules, which are only high level, and have a broader understanding of products and technical knowledge. One consultant once said it was the most difficult position he had to fill with both the knowledge required and the awful consequences of getting it wrong.

The competencies required include knowledge of a wide rage of FSA rules not just the financial promotion rules in COBs 3 as well as various codes and a sound generic technical knowledge including firm specific product knowledge. An examination requirement at least to FPC or MAQ level with the desirability of higher-level qualifications such as AFPC is also necessary.

In terms of skills required then all this knowledge needs to be put in context and explained in terms your milkman might understand. Attention to detail with the ability to view the whole document every time it is updated and take into account all the relevant changes not just the alterations you are told are necessary is vital. Being able to handle your customers is also important and the ability to make credible decisions with authority as well as being prepared to ask the right questions if you are not sure or doubt what you have been given. If you do not understand it the chances are the customer will not. Never rely on other people to pick it up but be prepared to point out all the mistakes as it may be that no one else spots the problem and before you know where you are your website is full of spelling mistakes!

Complaints can be useful for feedback and are, after all, a gift from the customer. Direct offer endowments coming up to maturity where performance and been below expectations raise complaints about the material used in the past. Often the benefits were sold in the covering letter whilst risk warnings retreated to contents of the pack. Whilst these cases mainly relate to performance and are rejected even if they go to the FOS there are lessons to be learned for the future in terms of the way covering letters are written and the prominence of risk warnings. In particular if a product is aimed at the younger age group why not point this out up front to avoid people in their 70s taking out endowment ‘savings’ without fully appreciating the consequences.

It does not take a genius to be an approver just a clear head and sound technical knowledge and experience. You cannot achieve balanced financial promotions without understanding the product. You should not be signing off pensions key features if you know nothing about pensions. Nobody is perfect and we learn by mistakes but always keep that customer focus in mind and not only might you avoid enforcement action but complaints as well.

Our next event is planned for 21 May at Axa Sun Life in Bristol on the theme of training and competence with Sarah Thwaites as our star FSA speaker. It is a joint event with the Insurance Institute of Bristol and a large audience is expected so book early.

Anthony Smith FCoI