The Financial Services Authority (FSA) confirmation that it is targeting and cracking down on Financial Promotions should come as no surprise to many in the industry. With Financial Promotions being the main link between intermediary and consumer, it makes sense that the regulator has committed so much attention to it. The announcement that the FSA has issued a warning to over 200 firms after failings within their Financial Promotions should also serve as a wake up call to the industry.
During October and November, the regulator visited a number of firms to discuss Financial Promotions breaches, and how firms could implement strategies to develop better and compliant advertising. However it confirmed that over 200 firms had been forced to withdraw or amend misleading advertising, a number that the FSA was keen to see quickly improve.
In a speech delivered in response to the FSA findings, Vernon Everitt director of retail themes at the FSA, said: “Financial advertising has a massive influence on the decisions people make. So it must be clear, fair and not misleading, leaving people with a balanced picture of the key pros and cons. This is particularly the case in advertisements by mortgage brokers in the non-conforming market, where people are making one of the most important financial decisions of their lives.”
He added: “We have found that poor advertising is a sign of wider problems in the way mortgage brokers are managed and controlled. We will continue to intervene where this might be the case, including taking further formal disciplinary action. Firms in this sector should be on notice that this is a priority area for us in assessing whether they are genuinely treating their customers fairly.”
Revisiting problem areas
The FSA has, over the course of the year revisited the area of Financial Promotions, commenting on improvements that need to be made. Type size and font, and the use and prominence of information have all been highlighted by the regulator as issues that need to be resolved. However, despite a number of calls from the industry, the FSA has refused to be drawn into compiling a template for the industry to follow. Indeed the area of Financial Promotions has been such a concern for some that they have withdrawn from advertising altogether for fear of breaking FSA rulings. Instead, they rely on word of mouth, and although this represents costs savings, it also diminishes their audience. A number of other organisations and networks have developed their own templates.
James Cotton, mortgage specialist at London & Country, said: “For small brokers, it has been quite an undertaking and takes up a lot of time. But if you want to take part in the mortgage industry, that’s what you have to do now. The rules are there to protect customers. Some intermediaries are better placed than others to implement them, but there are mortgage networks out there who will offer their services, support and advice.”
A wide spectrum
Financial Promotions is an all-encompassing tag. Stretching from newspaper adverts, to those placed in directories, radio and television advertising, Financial Promotions also covers the scope of the internet. With such a diverse range of media, it is nigh on impossible for the FSA to search through every advert.
The area of non-conforming mortgages in which the regulator has raised a number of concerns, most notably with the quality of advice given and the record-keeping by brokers in this area. However, although much has been made of the failings in this area, is it all to be blamed on the adviser?
It is fair to suggest that since the introduction of regulation to the sector, large firms, as a whole, have been able to comply with the changes more effectively and deliver any that were needed. However for the smaller firms, the onslaught of constant regulatory change has meant more and more time has been devoted to these matters, rather than the principle role of giving mortgage advice. Financial Promotions seems to be the main area that divides opinion. While all agree that advertising needs to be truthful, many have commented that the regulator has placed too much attention on text sizes and fonts – focusing on the aesthetics rather than the information.
Necessary rulings?
The FSA findings indicated that over 200 firms had failed to comply with the guidelines set. However, Rod Murdison, proprietor at Murdison & Browning, questions whether all of the rulings are necessary. “It needs to be decided, that if a firm did break Financial Promotions guidelines, whether there was intent to fool the public or if it was just that they didn’t dot the i’s and cross the t’s? It can be approached from two angles. I would feel very hard done by if I got punished for an advert where the risk warning was not in bold print or of a sufficient size. But I can understand the reason for that – someone would take it to the extreme and make the print so small as to be unreadable.”
However, two years on from regulation, Ray Boulger, senior technical manager at John Charcol, said intermediaries should have been able to devote enough time and resources to addressing any regulatory concerns, including Financial Promotions. He argues: “I don’t think there is any excuse for firms, be they a broker or lender, working with the rules, to get it wrong. The rules are complicated, but nevertheless it’s clearly a requirement that firms have an obligation to understand in some way or another. Be it through external or internal means, the ultimate responsibility is for the firm.”
“The FSA is keen to provide guidance. At the senior level, where a large broker deals with an individual relationship manager who knows the firm, it is good.”
However, Boulger concurs the FSA could do more to help small firms to better understand the guidelines regarding Financial Promotions. “At a grassroots level for a small broker phoning the call centre, the quality of advice does leave something to be desired. The advice will vary and won’t be of the same level. There are areas the FSA could improve.”
Since regulation of the mortgage market in October 2004, the FSA has taken enforcement action against 12 firms, while a much greater number of firms have been reprimanded for smaller breaches, that the FSA has helped to eradicate. However, with so few fines, some brokers have claimed that the FSA is not in a position to act, with the area of Financial Promotions too diverse. However the announcement that it is actively engaging with firms who are producing non-compliant adverts, most notably regarding the non-conforming marketplace, suggests that the FSA is finally showing its teeth.
However, as Boulger argues, the financial services regulator could have acted much sooner to make mortgage intermediaries fully aware of the action being taken, and the risks and results of getting their advertisements and Financial Promotions wrong. “It would have been better if we had had this robust action from the FSA quicker, as two years is a long time to wait. Certainly, some firms have got their acts together, but if the regulator is doing things behind the scenes and not publicly, it can lull people into a false sense of security. Public comment is helpful to remind mortgage firms not to go too far down that road.”
Non-compliance
A number of intermediaries have also accused some firms of deliberately flouting the rulings, knowing full well that the FSA does not have the resources to tackle every non-compliant piece of literature. Murdison says: “The rules are an advert has to be clear, fair and balanced. There are some areas where that is a matter of judgement and some where it is a matter of fact, such as fees. Most firms are trying to get it right, but those who use misleading adverts do get an advantage. It is difficult to differentiate between intentional and unintentional mistakes. There could well be a situation where the FSA interpretation is different to the firm’s.
“Having said that, someone will always chance their arm and there will always be dubious people in the mortgage market because of the sums of money involved. The difference in adverts comes down to whether there was the intention to mislead or not.”
Boulger agrees, adding: “There are some firms being very cavalier with what they are doing and they are not trying very hard to be compliant with what the FSA asks. There has been improvement, but it is equally clear to me where most consumer detrimental non-compliant adverts are is in the non-conforming market. The fact the regulator has targeted the non-conforming market initially is sensible. It is recognised as where there is a particular problem.”
“We are talking about a minority of firms, as the majority are trying to get it right. This is about hard core breaches, where a cavalier approach has been taken.”
It is clear that the regulator is determined to eradicate bad practices within the Financial Promotions arena and the announcement that it is to follow up its review means mortgage intermediaries need to ensure that they follow guidelines and procedures.
