Shortly after I wrote that article, the FSA published a report entitled, Poor financial advertising in sub-prime market a sign of wider problems.
The key finding of this report was that mortgage brokers in the sub-prime market who issued poor financial promotions usually had inadequate systems and controls overall and gave poor quality advice. Thus, in this market, poor advertising and other promotional activity usually indicated wider problems in the way a firm was managed and controlled.
The report found that too many firms were making no attempt to issue clear, fair and not misleading advertising and as a result some firms have been referred to their enforcement division. Although this report referred only to brokers it seems to me the principle that poor advertising, etc is usually a sign of wider problems is likely to apply generally, to lenders as well as brokers. On this basis, firms with compliant financial promotions are less likely to find that their advertising becomes a trigger for an additional FSA compliance visit.
Another reason for focusing on clear communication is that the FSA sees advertising, along with complaint handling, as a key ingredient of TCF and how well these issues are handled is a key indicator to the FSA of how seriously a firm applies TCF in practice.
As the FSA moves towards principle-based regulation, it is principle seven which underpins their whole regulatory approach, which says “A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.”
This will be crucial, with the explanation of risks needing to be sufficiently prominent. Firms should ask themselves whether every financial promotion is clear to its target audience and if the promotion provides a fair and adequate description of the risks and drawbacks of the product so as to provide a balanced picture.
The move to principle-based regulation presents an ideal opportunity to focus on what is important and dispense with misleading detail, namely the APR calculated in accordance with the current rules, and worse still for buy-to-let advertisements, two APRs.
Although some improvements were made a couple of months ago to the requirements where a product regulated by the Consumer Credit Act is advertised by an FSA-regulated firm, the farce of having to quote two APRs in such advertisements remains.
With the average life of a mortgage only about three years, and the average time a borrower remains on their initial deal even less, to be useful to consumers, APRs should be based on the term that a borrower expects to stay on the specific deal. Under current regulatory requirements the APR misleads consumers, technically making most financial promotions non-compliant.
Ray Boulger is senior technical manager at John Charcol.