The FSA's investigation into marketing literature is loking at one of the fundamental elements of any business process – trust.
The FSA will ask how much faith IFAs have in marketing material, amid concerns over the role of marketing departments following the split-capital investment trust and structured product debacles.
Essentially, the regulator is examining whether IFAs believe what providers say about their products.
David Aaron Partnership investment analyst Robin Bone says: “We can only assume that providers' marketing material is 100 per cent factually correct and that the provider has an honestly held view that the product will do what it is supposed to. But the IFA must still hold a product up to a critical light and question whether it is the right product.”
The FSA's investment firms division, led by director David Kenmir, will begin by sending out questionnaires to around 100 IFAs and holding interviews to see if the issue merits a full investigation.
FSA spokesman Rob McIvor says: “There will not be a 300-page consultation paper at the end of this. At the moment, we are sticking our finger in the water to see what is happening. If we do find a problem, we will then look at what we have to do to address it.”
Industry misselling scandals have led critics to question whether anyone could have seen the problem coming. Bone says it will be important for the FSA to consider what was in an adviser's mind at the time of the sale. “You have to go back to square one and ask did the adviser act honestly at the time the product was sold? If the adviser acted in good faith, then you cannot ask much more,” he says.
Lloyds TSB has already paid a huge fine and compensation for its failure to stress-test its Scottish Widows structured products to ensure that consumers understood what they were buying.
The FSA's investigation is most likely to focus on products with features that are not immediately apparent but it may also look at claims made in the marketing literature for more straightforward products and analyse how to separate hard fact from opinion.
New Star marketing director Rob Page says intermediaries should be able to have implicit trust in the factual nature of marketing but they must make an individual assessment of anything that goes further.
“If, for example, we think China is going to be a strong growth area and we give a bunch of reasons why we think that is the case, it is up to the individual investment intermediary to decide whether they are in support of that view,” says Page.
Syndaxi Financial Planning director Robert Reid says simplicity is the key to safe advice. He says: “I have always said if you cannot understand a product within 10 minutes, then there is no chance of a client understanding it, so chuck it in the bin.”
Page says: “No decent intermediary would recommend something they do not understand themselves. If you do, then you should not be in the business.”
But Reid fears that some advisers are running risks by selling products simply because they trust the brand. He says: “We still have a great British faith in the brands of product providers. There are a lot of advisers out there who, if they see the right company name on a product, will sell it I wonder sometimes if the marketing departments of product providers understand the products they have created.”
Bone says: “With-profits is a massively complex area and I am not sure life companies' marketing departments understand exactly how some of their products work. On with-profits, advisers have lost a lot of trust.”
If the FSA decides there is an overreliance on promotional material by intermediaries, it could change the financial promotion rules.
In the mortgage sector, the FSA is planning tighter rules to ensure that advertisements give equal prominence to the possible disadvantages and advantages of a product. At present, product providers have a duty to ensure that factual details are accurate and that opinions expressed are not injudicious.