Your IndustryJan 21 2015

Getting financial promotions right

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According to information obtained from the FCA, there was a 61 per cent jump in the number of financial promotions withdrawn or amended at the FCA’s behest in the year to end of June last year, from 204 in 2012/13 to 328 in 2013/14.

This was the result of an increasingly interventionist approach by the FCA, as well as a slew of recent updates to the guidance on financial promotions. Firms are clearly still struggling with getting compliance in this area right.

The FCA has also made use of new powers to intervene in firms’ marketing of financial products. In a recent case, the FCA used its temporary product intervention powers to ban the sale of an investment instrument to retail investors for one year.

Investment firms are grappling to understand how they might implement the FCA’s impending guidance in areas such as promoting financial products on social media, and are managing a changing competitive landscape in the post-RDR retail market. There are innovative companies using non-traditional forms of communication to advise customers and advertise their services. Web-only offerings such as Nutmeg and Money On Toast are changing the way that advice and investment management can be delivered to a mass affluent market.

We have seen a number of new entrants raising money and preparing to launch, and who are aiming to further shake up the investment advice and management market. In capital-raising markets, crowdfunding platforms are reaching across the affluence spectrum to market unlisted opportunities to investors who may not already have much traditional investment experience.

The challenge for new entrants and existing providers is how to reach potential customers in a way that works with the regulations. In basic terms the principle is that all financial promotions must be fair, clear and not misleading, and have due regard for the information needs of the audience. All the other detailed rules flow from this idea. So, for example, the promotion must give equal prominence to the risk of investments as well as the benefits. They must be written in clear, non-jargon terms. In shorter formats, such as Twitter, achieving all of this is plainly tough, and many firms use them mainly to raise their brand profile.

All the regulations seek to do is give consumers enough information to make an intelligent and informed decision about the risks and benefits. So sensible transparency from firms is the key.

In practice, achieving this transparency is not always easy, and requires an investment of time and energy from the firm. Where firms do not think in detail about the needs of the target audience for their particular publications, we still see financial promotions that contain generic risk warnings in small print, or have them jammed together at the back of the promotion under a ‘disclaimer’ heading. A large, general disclaimer of liability is obviously not at all what the regulator is looking for – it is not in keeping with the spirit of the rules, and more importantly is meaningless to clients.

The use of exclusionary jargon is also common. Firms often assume that the audience has heard of various indices or measures. For instance, does the average consumer know what VaR stands for, or understand the effect of hedging measures? Being engaging and up-to-date without over-simplifying or being condescending to the audience is a difficult balancing act to achieve.

A common failing is a promotion that discusses the risks within a product, but which misses out a crucial risk to the customer’s capital from using that particular product. For instance, if a particular investment is denominated in US dollars, but the intended customers are all UK-resident domiciled individuals, a key risk to them would be the US dollar/sterling exchange rate. So too would any foreign exchange spread and fees taken by the firm. Is a statement such as: “Fluctuations in foreign exchange rates may have a significant effect on returns” enough to be sufficiently clear about the risk to the capital of the customer? Again it depends on the target audience. If you are writing only to intermediaries or sophisticated, experienced multi-currency investors, then arguably yes. But if your audience includes people who have little or no experience of multi-currency investments, then would it be appropriate not to specifically draw their attention to that risk?

We often see examples of simulated performance. This is particularly common in promotions concerning advisory or discretionary services that seek to show how a portfolio would have performed during past stress periods. Depending on the details of the service or product, this is very problematic. It is difficult to find exact replica products over a long time period, and as there may not be an exact correlation between those past assets and the actual assets in the portfolio. Firms often show the performance of an index, since they cannot show the actual performance of investments they had not bought over that time period. Explaining the downsides of that approach easily and simply in a marketing publication is a challenge.

Of course the point of getting the promotions right is that customers buy the right product or service for them. Apart from providing the best service, it also means that clients will be less likely to complain or litigate.

So how might a firm organise itself for success in this area? There are different models, but the key is that the individuals drafting financial promotions must be educated in the regulatory expectations and have the customer at the heart of what they do. We often see compliance departments acting as if to provide an independent view, but as soon as you get the compliance departments involved in drafting, it will slow up the process and increase the costs of compliance. However, the responsibility for ensuring that promotions are correct lies with the first line of defence, the business. Clearly-defined responsibilities are essential – a qualified person should be appointed to approve the promotions internally from the first line of defence. What works well is to agree templates for regular promotions, such as sales notes or non-independent research, and then have sign-off of updates within the first line of defence.

Although producing compliant financial promotions can be a balancing act, firms can organise themselves to succeed in this area, but the key is having the customers’ needs at the heart of the process. As with many areas of regulatory compliance it is worth remembering that it is the customer that the firm serves, and in many respects the customer’s needs outweigh those of the firm. Firms must also work harder to place the responsibility and controls for the content in the first line of defence and not use the compliance department as an integral part of that process.

Mark Spiers is head of wealth management and banks at Bovill

There was a 61 per cent jump in the number of financial promotions withdrawn or amended at the FCA’s behest in the year to end of June.

A common failing is a promotion that discusses the risks within a product, but that misses out a crucial risk to the customer’s capital.

As soon as you get the compliance departments involved in drafting, it will slow up the process and increase the costs of compliance.