Financial Promotion - FSA's latest stance

United Kingdom
FSA’s Approach to Financial Promotions (April 2002) and CP132: Presentation of past performance and bond yields in Financial Promotions (April 2002)

FSA has examined its approach to financial promotions for investment products, with its principal concern being that marketing messages can outweigh counterbalancing factual information. Apparently, two thirds of customers do not properly understand products which they have bought.

Risks to consumers include:

  • Lack of balance in the description of benefits. FSA COBs require that a financial promotion gives a fair and balanced picture (COB 3.8.8, 3.8.9). FSA says that it will vigorously monitor compliance with this;
  • Misleading claims which create unrealistic expectations. FSA says that it will monitor to ensure that key information is presented within the body of a promotion;
  • Information is hidden in small print. Firms must ensure that important information is not conveyed solely in small print (4.15). FSA has published a separate Consultation Paper on past performance - see below.

FSA says that risks are becoming increasing material in a low inflation environment, particularly with the promotion of more complex products with hidden risks. It refers in particular to:

  • Hidden features, such as risk to capital and exit penalties. Disclosure must be fair and adequate and not couched in technical terms. FSA will also revise its requirements for Key Features Documents;
  • Product complexity: FSA is separately reviewing the retail sale of “complex and risky equity-linked products that provide capital protection. A key concern is that customers do not understand the risks involved;
  • Misleading claims, such as in relation to past performance, headline rate of return or inappropriate comparisons.

FSA says that it is unlikely to require mandatory specific risk warnings, but that firms must ensure that they do not obscure any risk message (4.10).

If a firm refuses to modify or withdraw a promotion, FSA will use its new powers of enforcement, including the exercise of the own initiative power to vary Part IV permission (4.26), and will take disciplinary action if needed (4.28).

FSA does not wish to pre-vet advertisements other than in “particularly novel or complex cases, or where it requires a firm with a poor compliance record to pre-submit all advertisements (4.26 - 7).

Customers take great interest in past performance (CP 132), and may extrapolate future performance from it, although research shows that it is not a useful indicator. FSA therefore proposes changes to COBs to reduce the emphasis placed on past performance in financial promotions:

  • Past performance may not be the predominant message in a financial promotion;

  • Past performance may not be presented as a projection, or indicative of future performance;
  • FSA will amplify the current warning about past performance not being a guide to future performance. FSA is considering the use of mandatory wording but may, instead, require that firms state “unambiguously and without reservation that past performance is not a guide to future performance;
  • Restricting the use of hypothetical past performance to funds that are not actively managed and which fulfil other criteria;
  • Detailed information must be provided when giving information about the yield of a corporate bond fund.

FSA proposes to make rules on past performance in September 2002 with a three months transitional period lasting until December 2002.

For further information please contact Simon Morris by telephone on +44(0)20 7367 2702 or by e-mail at simon.morris@cms-cmck.com.