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.