When the mortgage market was regulated in October 2004, intermediaries promotional activities became subject to a set of rules which were far stricter than anything that had applied previously. However, mindful of the fact that many financial advisers already had marketing materials in use, the Financial Services Authority (FSA) allowed a period of grace for all promotional materials to be bought in line with the new Financial Promotions rules.
That period of grace has now well and truly come to an end. Firms were given until 31 January 2005 to update any adverts or promotions they were running, and until 31 October 2005 to update any directory entries. More than six months has now elapsed since the last of those deadlines and, unfortunately, there is still evidence that some brokers are not playing the promotional game according to the rules.
Whether this is out of ignorance, or whether it is a deliberate attempt to sidestep the rules, doesn’t really matter, because the potential consequences are the same: a hefty fine from the FSA. Although the FSA has not yet used its powers to impose big fines on intermediaries for breaches of the Financial Promotions rules, I suspect it is only a matter of time before it does. The FSA has made it perfectly clear that it intends to look closely at Financial Promotions this year and I believe the ‘tolerant’ FSA will subtly transform itself into the ‘enforcer’. Don’t say you haven’t been warned.
The FSA has a ‘whistleblower’ scheme in place, which is specifically designed to encourage intermediaries to shop colleagues who decide to try and side-step the rules. Why would anybody contemplate ‘ratting’ on a fellow intermediary? Because, if they don’t, the non-compliant intermediary has a potential market advantage, both in terms of not having to carry any compliance costs and having an advert which may be harder hitting because it hasn’t had to take into consideration the Financial Promotions rules. Intermediaries should be willing to shop persistent offenders and not feel guilty about the consequences.
However, there is a great danger that the scale of the problem is over-exaggerated. Although some breaches may be deliberate, I suspect that most are innocent errors and can easily be corrected. Although intermediaries do need to be mindful of the regulations, they should not live in permanent fear of them and the worst possible outcome would be for intermediaries to stop advertising for fear of making a mistake.
Understanding Financial Promotions
Advertising and promotional activity is an important part of any intermediaries business activities. Intermediaries cannot afford to stop promoting their services – generating new business is tough enough as it is. Understanding the Financial Promotions rules is not as difficult as it may at first appear and there are some common themes that intermediaries need to keep in mind when producing adverts and promotional material.
The first point to bear in mind is that the definition of a ‘qualifying credit promotion’ is any promotion that invites or induces a person to enter an agreement for the provision of credit secured on land (whether by first or second charge) by an authorised firm, or relates to the advising on or arranging of such credit.
The promotion can be either ‘real-time’ such as direct, personal visits or ‘non real-time’, such as advertising, mailshots, e-mails, websites and TV adverts. The only time an advert will be exempt is if it is either not aimed at the general public (e.g. adverts targeting intermediaries) or if the advert includes only the name of your company, your logo, the fact you deal in mortgages, and a point of contact. A good rule of thumb is that if you refer to products and if you are trying to reach members of the general public, your advert will probably be classed as a qualifying promotion.
Assuming an advert does qualify, it must be approved by an approved person. If you’re an appointed representative (AR), that means it must go via your network principal. If you work for a directly authorised (DA) firm, an approved person within the firm must sign-off the advert.
Good record-keeping is of paramount importance. You must keep a copy of each draft of the promotion with a note of who approved it, along with details of where the advert appeared and on what dates. You also need to be able to substantiate any claims made in the advert and keep a record of how you calculated the representative APR on a particular promotion. Copies of all final versions of promotions must be kept for at least 12 months after they are withdrawn.
Do ensure that your promotions are clear, fair and not misleading and assume no or little specialist financial knowledge on behalf of the reader. When it comes to laying out adverts, you need to ensure that due prominence is given to certain pieces of information such as risk warnings, APRs and regulatory statements. Consider factors such as text size, colour and position on the page – these are all factors which contribute to ‘due prominence’.
On the subject of due prominence, you may also want to use the FSA logo. This is fine on letterheads and e-mail equivalents, but you cannot use it to endorse products, services or communications and it cannot be used on paper-based promotions or on your website. You must also write ‘Financial Services Authority’ in full the first time the FSA is mentioned.
Online Financial Promotions
Websites are subject to the same rules as other forms of qualifying credit promotion, but there are also one or two additional factors you need to take into consideration. Firstly, when a consumer looks at an individual web page, all the relevant information (e.g. disclosures and warnings) should be visible on the same page – the consumer should not have to scroll down or click onto a link page to view additional information. Secondly, there is an extended regulatory statement for use on websites; make sure you are using the correct one.
Any banner adverts or hyperlinks used on the internet to promote your services fall within the Financial Promotions rules, so do ensure they are properly checked. If you are using links to and from your website, make sure the consumer is given a clear warning that they are leaving your site and that the site they may be clicking through to meets the website compliance requirements. The same record-keeping principles referred to above, also apply to websites.
APR problems
APR’s are one of the areas which have clearly caused problems for intermediaries, particularly when it comes to quoting representative APR’s for specialist mortgages. Any qualifying credit promotion which includes price information such as product interest rates, payment of fees or charges, or references to the frequency or amount of repayments, must quote an APR. If you are promoting a range of products rather than a specific one then you need to quote a ‘representative APR’.
Likewise, any promotion making reference to the availability of credit to groups of individuals who may otherwise consider such access restricted, e.g. CCJs, Individual Voluntary Arrangements (IVAs), the self-employed, council tenants, bankrupts, etc, must also quote an APR for the product or range of products in question. If no product is mentioned or if it is for a range of products, then a representative APR should be shown.
When promoting specialist mortgages, a representative APR must be quoted, even if you do not mention interest rates anywhere in the promotion. This must be equal to or lower than the APR that 66 per cent of people responding to your promotion would expect to pay, if they entered into the mortgage contract that is the subject of the promotion. When determining the representative APR, account should be taken of the business which has arisen from similar promotions made by the firm in the previous 12 months and where the promotion is for a new product, reference should be made to relevant business plans.
Unfortunately, there is not the space within this article to give an example of how to calculate a representative APR, but help is at hand. A free guide to Marketing in a Regulated Market, which has been specifically written for mortgage intermediaries is available as a free download from the Mortgages plc website, at www.mortgagesplc.com. It gives a fully worked example of how to calculate a representative APR, expands on all of the points in this article, and specifies all the prescribed wording which should be used by intermediaries in their Financial Promotions activities.
The regulator is monitoring Financial Promotions closely so it makes good sense to ensure you get your marketing communications activities right. Most importantly, however, do keep marketing – it is the life-blood of your business.
Julian Wells is head of marketing at Mortgages plc and an associate member of the Chartered Institute of Marketing
