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Promotion battle

Compliance expert Adam Samuel believes the FSA is shifting its focus to check up on general insurance and mortgage advertising and he urges firms to ensure they stick to the letter of the law and to set up systems to cope with the regulations.

Last year, the FSA issued four bulletins on mortgage and general insurance promotions and five fines for breach of the financial promotions rules on the investment side.

The material coming out of the regulator suggests that this trend will be reversed. Regulatory pronouncements on payment protection insurance, critical-illness cover and equity release show increasing frustration with the standard of general insurance and mortgage advertising.

Every regulated business must have a policy and systems on financial promotions. Anything that aims to induce a customer to seek advice or buy a product is a promotion, including websites and newsletters.

There is an exemption for material containing just the name, logo, contact point and brief factual statement of the firm’s main occupation. But the general rule is that if a promotion works, it is regulated. If the firm mentions anything beyond its main occupation or expresses enthusiasm, the FSA rules apply.

All regulated promotions must be approved by a competent person and reviewed for continuing compliance.

A firm can only rely on someone else’s approval if it does not change or add to the original material and uses it within the approval’s terms. Never assume that marketing material sent to brokers has been approved.

The FSA has criticised networks for rejecting promotions or insisting on amendments and then not checking whether the changes required have been made.

Firms that withdraw confirmation because a promotion is out of date must tell everyone who has relied on it. Businesses must block access to expired material or mark it clearly. The FSA suggests a review date for each promotion.

The rules lay down three standards for general, specific and direct offer cases. General material needs only be “clear, fair and not misleading”.

Specific promotions covering a particular product have to contain risk warnings. Direct offers – which enable the customer to purchase directly – must contain warnings and point of sale material.

“Fair” has been interpreted by the FSA to mean “balanced”. So, if a promotion says something positive, the pitfalls of the product or service should be described with equal prominence. This effectively assimilates the rules for general and specific promotions. It also clogs ads with negative comment.

A promotion must show with equal prominence the exclusions and penalties, particularly the “significant or unusual” (Sue) ones.

Warnings or qualifications must not appear in small print, at the bottom of the page or separately. It is difficult, though, to decide how much prominence is necessary. Strict application of regulatory material would make most advertisements unreadable.

Enforcement practice, though, suggests a possible distinction. Higher-risk products, notably pension unlocking – perhaps equity release and PPI – must carry specific warnings on all promotions.

But mistakes can be detected by basic checking. The FSA has criticised the use of statistics to promote critical-illness cover that does not cover all the diseases included.

Firms have misdescribed the protection available under critical-illness policies as like PHI contracts, “simple” or providing everything needed on diagnosis of cancer.

Mcob and Icob add a further layer of rules. Promotions referring to possible financial savings must indicate how this will be achieved. Where the ad refers to non-standard facilities, it must clearly mention any additional fee payable. Any interest or charges generating by exercising a payment holiday option have to be disclosed.

If promotions mention the FSA and anything it does not regulate, the material must indicate what falls outside the regulator’s remit. Do not use the FSA logo.

Mcob insists on certain terminology – “early repayment charge”, “higher lending charge” must not appear as “early redemption penalties” or “Mig”. “Regulated lifetime contract”, “overdraft”, “interest-free”, “no deposit” and “gift” all have prescribed meanings.

Firms must state the APR for each loan described if the promotion contains either price information for a specific item or refers to the availability of credit for customers who might think that their access was limited. This has to appear immediately after any rate or charge, clearly distinguishing the two. The APR must have equal prominence to price information or any material about credit availability. The latter typically mentions credit history or rating, CCJs, employment or housing.

An APR has to be presented as “The overall cost for comparison is % APR” and not appear in brackets.

If the rate varies, the one given must represent business expected to be generated by the advertising. Where a third of respondents generates a higher figure over a reasonable length of time, the promotion needs changing. Essentially, the firm must think that 66 per cent of all customers applying will receive the stated rate or better. Averaging is unacceptable.

Variable-rate promotions must say: “The actual rate available will depend upon your circumstances. Ask for a personalised illustration.”

For lifetime mortgages, unless the advertising is in transient form such as radio or television, it must say: “This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.”

When converting unsecured to secured debt: “Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.”

Otherwise, the regulator insists on: “Your home may be repossessed if you do not keep up repayments on your mortgage.”

Finally, for foreign currency mortgages, the promotion must say: “Changes in the exchange rate may increase the sterling equivalent of your debt.”

The force of these statements must not be blurred by surrounding text.

Independent firms which refer to their prices have to quote a fee in cash or percentage terms. They cannot offer a range of rates.

An ad must clearly disclose any tie-in between the offer and the purchase of products or services from a particular firm or its representatives.

Icob prescribes less. If the ad quotes a premium, it must be representative. Do not aim a promotion at an area not covered by the rate described. Special offers have to state their time or other limitations.

Where material suggests that a firm can reduce or provide the lowest premium or reduce the customer’s outgoings, it must say the basis on which the reduction will be achieved, notably the provision of less cover. The criteria for any drop in price must be set out.

Firms must not describe a general insurance product as long-term without making it clear whether this relates to the length of benefits or the policy.

Many of the problems encountered by the FSA in mortgage and GI regulation result from firms not building appropriate systems for managing promotions. In many instances, a careful read of the material should have identified the problem. The rulebook, particularly Mcob, has awkward prescriptive rules, particularly about APR, that the FSA has never impact-tested. The onus, though, remains on businesses to observe the rules.

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