Financial advertising has long been subject to complex regulations. Following years of criticism, the Financial Services Authority (FSA) last week announced proposals to halve the number of rules covering financial promotions.
Why is the FSA proposing regulation changes?
The FSA's aim is to 'promote efficient, orderly and fair markets and to help consumers achieve a fair deal'. Recently, this has involved the FSA working to put a commitment to 'treat customers fairly' at the heart of all businesses.
The FSA realised that marketers 'box ticking' against its prescriptive, formal rules might hinder them from fulfilling such a requirement. It now recognises that an ad is only the first point of contact that a consumer has with a brand; cautionary information can now be communicated once the consumer has expressed initial interest.
This realisation coincides with the European Union's introduction of the Markets in Financial Instruments Directive (MiFID), which aims to create a single financial-services market across member states.
To ensure UK rules comply with MiFID and to encourage firms to take more responsibility in treating customers fairly, the FSA decided to revamp its Conduct of Business rulebook, including rules on financial promotion, to make it more principles-based.
What are the most significant revisions?
The main rules that will disappear are product-specific, which mandate the inclusion of specified information in promotions, such as particular risk warnings, tax disclosures and information about products. In short, the wording of clauses that must be displayed on ads will not have to be so specific.
The FSA says 'firms will need to decide for themselves what information is relevant' by adhering to the principle that promotions must be 'clear, fair and not misleading'.
However, this does not mean that all specific rules will disappear, nor that the rules will be less strict. The rules will remain when firms want to compare their product or service with another in ads.
The rules governing past performance of investment products will be relaxed, to conform with MiFID rules. Ads that focus on past performance will still be banned, while those that mention it will still have to warn that the data refers to the past, and is not a reliable indicator of future results. However, there will no longer be a presentation standard that requires information to be shown in table form using a percentage format. Also, there is greater flexibility with regard to the wording and prominence of the warning.
Will financial-services marketers be given more freedom?
The FSA hopes the principles-based approach will give firms more flexibility in planning their marketing. 'Providing flexibility rather than prescribing detailed processes should enable firms to compete and innovate more effectively in product design, the quality of customer service, and in providing value for money,' says FSA retail markets managing director Clive Briault.
How have marketers reacted to the changes?
The Association of British Insurers has welcomed the FSA's commitment to less burdensome rules because it believes they will help the industry to encourage consumers to save more.
Lucian Camp, chairman of financial advertising specialist cchm:ping, also believes the changes are positive. 'It is very hard to be against principles and a focus on outcome, because that is the approach we take to briefings,' he says.
Camp is also pleased that the FSA is recognising for the first time that financial decisions are a 'journey' for the consumer and that the closer to the sale, the more information they will need. 'If the current system was applied to other sectors, you would end up with posters advertising a luxurious hotel, but warning that the trifle in its restaurant may contain nuts,' he says.
However, the Institute of Practitioners in Advertising (IPA) is less confident. 'The FSA couldn't cope with interpreting its own rules, so is passing the burden of compliance to advertisers,' says IPA legal adviser Marina Palomba. 'It is almost impossible to know what is acceptable, and it is a huge burden on advertisers and their agencies.'
There are also fears that the FSA's structure is not transparent enough to cope with the changes. Unlike the Advertising Standards Authority, it does not publicly explain its judgments on brands that have contravened its rules. Last week, John McFall, the chairman of the government's Treasury Committee, said he was concerned that the FSA 'offers no public scrutiny and little incentive for advertisers to keep the rules', and called for it to highlight poor practice.
McFall compared the FSA's complaints process with that of the ASA, which publishes the results of investigations and explains clearly why it has found for or against a certain ad. 'The ASA regime also provides the capability to have ads checked for their adherence to the code,' he said. 'I would encourage the FSA to examine whether any aspects of the ASA model would prove useful in protecting consumers' interests.'
Could a Broadcast Advertising Clearance Centre-style body be set up to aid compliance?
Despite the government and industry calling for the formation of a body to help advertisers to check that copy complies with the new rules, the FSA has ruled out such a move.
'The FSA is trying to get management to take responsibility and to stop thinking about how to rip off the customer,' says Camp. 'If it was to start advising on advertising, it would turn into judge and jury, rather than regulator.'
The revamp is a brave step for the FSA. It is likely to face complaints from the compliance departments of finance firms, which are fighting a move away from the safety of box-ticking. But marketers look set to benefit from the move to principles-based regulations, with the greater freedom to devise communications they have been seeking.
DATA FILE - TIMELINE - CONSULTATION PROCESS
28 November: The consultation period on aspects of the FSA's new code of business (NEWCOB) that relate to MiFID ends. The FSA says all aspects relating to MiFID are clearly marked in its consultation paper, CPO6/20, which is available on its website.
23 February 2007: The consultation period on NEWCOB proposals not related to MiFID ends.
1 November 2007: NEWCOB comes into force.