Financial Promotions play a key role in the UK’s mortgage market enabling lenders, networks, packagers and brokers to advertise their products and services to consumers and drive sales.
On 31 October 2004 the Financial Services Authority (FSA) took over the regulation of most mortgage sales in the UK.
The FSA aims ‘to deliver an efficient and effective retail market in financial services and so help consumers achieve a fair deal’. Clearly the way in which mortgages are advertised is vital to ensuring that consumers are given accurate information about the products on offer.
The consequences of getting Financial Promotions wrong can be significant, resulting in unsatisfactory outcomes for both consumers and mortgage firms. It is important therefore that mortgage firms and advisers ensure that consumers receive clear, simple and understandable information which enables them to be confident in the decisions they make about buying a mortgage.
Clear, fair and not misleading
The main tenet of the FSA regulations relating to Financial Promotions is that all communications that aim to entice consumers into buying a mortgage should be clear, fair and not misleading – this applies to mailshots, e-mails, websites, adverts, advertorials and promotions.
The phrase ‘clear, fair and not misleading’ could be viewed subjectively and left open to interpretation, but the FSA does set out quite specifically what it expects in order for mortgage promotions to comply with its rules. These rules are published in the Mortgages: Conduct Of Business (MCOB) section three of the FSA’s handbook.
All communications should use plain and intelligible language and not leave out anything that would make the promotion unclear, unfair or misleading, for example, early repayment charges, completion fees or higher lending charges. The disadvantages of the products or services being offered should be displayed just as prominently as the advantages and the information must be accurate and able to be substantiated.
It is also a requirement that all key information appears on the same page and in roughly the same place, so that consumers are openly presented with the facts about the mortgage product or service, for example, APRs, reversion rates, risk statements and fees.
The use of phrases such as ‘best mortgage adviser in Wales’ or ‘best buy-to-let products in the market’ should be avoided as they will be viewed as making false claims that cannot be substantiated. It is also important that there isn’t an emphasis on gimmicks, such as offering a free digital radio that is only collectable if the customer takes out a mortgage.
The design of the promotion should be such that all key information is clearly visible and particular attention should be paid to displaying the prescribed FSA wordings and risk statements. The fee for paying off or part paying off a mortgage early must be called an ‘early repayment charge’ and any premium charge for higher LTVs must be called a ‘higher lending charge.’ The risk statement that appears on nearly all regulated mortgage promotions is: ‘Your home may be repossessed if you do not keep up repayments on your mortgage’.
The FSA is specific about displaying APRs and dictates that if any kind of pricing information is included in the Financial Promotion then the relevant APR must also be included. If the deal involves a number of rates over several years, the overall APR for the entire term must be stated. The FSA prescribed wording for APRs is ‘The overall cost for comparison is x per cent APR’.
There are also rules relating to getting a promotion approved, to confirm that it complies with MCOB 3 and this confirmation must be provided by someone with the relevant expertise. It is also necessary to keep records of all Financial Promotions for regulated mortgages for one year from the last issue date, together with the date and confirmation of approval, evidence of factual statements and APR calculations.
This all seems quite onerous, but in practice the rules are straightforward. The vast array of products available in the mortgage market are made up of similar constituent parts, and mortgage promotions can be designed and produced in a formulaic manner to ensure that each regulatory point is covered. Any individual or firm undertaking regulated mortgage activity would be wise to take the FSA rules seriously and put the proper measures in place to ensure that their promotional activity is compliant. This would include ensuring that there is an effective approval procedure in place carried out by adequately trained staff.
Results and improvements
Since the introduction of the FSA regulations in 2004, it has been reported that there have been significant improvements in the quality of product and service promotions in the financial sector, for example, improvement in the balance of product descriptions, better use of risk warnings and the use of small print for key information has almost disappeared.
However, there have been concerns about the promotion of non-conforming mortgages, where the target audience is deemed to be at greater risk due to their borrowing requirements and financial situations.
Margaret Cole, director of enforcement at the FSA, has said that ‘taking out a mortgage is one of the most important decisions anyone makes during their life. Poor practice by firms in this area therefore poses a high risk to consumers – and this is particularly the case when it come to non-conforming mortgages, given the vulnerable nature of the target audience’.
The FSA has put its focus on the non-conforming market in particular over the last year and has told more than 200 firms to withdraw or amend misleading promotional material. There was a case just recently where the FSA fined a mortgage firm £10,500 for poor Financial Promotions.
It was deemed that the firm in question was using mortgage product promotions, which meant that customers did not receive reliable information to help them make informed choices and achieve a fair deal. The FSA also found that the firm did not have adequate sales processes for recommending mortgages to consumers and neither did it have adequate systems and controls in place to ensure that the firm complied with the regulatory requirements.
It was reported in October this year that more than half of the FSA hotline complaints about Financial Promotions are related to mortgage broker adverts which has resulted in 300 broker firms being contacted about their advertising activity. Although only four of these firms faced enforcement, this level of complaint does indicate that there are still a number of areas of concern with regard to the advertising of mortgages in the UK.
Unregulated mortgages
Up until now and for the foreseeable future, there are certain areas of the UK mortgage market that remain unregulated, for example, buy-to-let and commercial mortgages. These types of mortgage are viewed by the regulator as commercial business transactions, entered into by informed investors who are capable of weighing up the risks involved, and therefore not in need of the same level of protection as residential mortgage consumers. Despite this, those operating in the unregulated mortgage market may benefit from adhering to the principles of FSA regulations when producing advertising material.
The FSA rules are driven by common sense, the principles of good business practice and, of course, the concept of ‘Treating Customers Fairly’. Whatever type of mortgage business an adviser or firm writes, having a reputation for misleading customers is extremely damaging and to be avoided by any business running a professional and respectable operation. MCOB 3 can therefore be referred to as a guide for producing good advertising material for those operating in the unregulated mortgage market.
Although it is not a requirement in the Buy to Let and Commercial mortgage market, TBMC aims to produce promotional material that is compliant with the current FSA regulations for financial promotions and follows an approval process to ensure that its emails, flyers, promotions etc are fair, clear and not misleading. This also means that the appropriate systems and controls are already in place should Buy to Let or Commercial mortgages become regulated in the future.
To conclude, the FSA regulations on Financial Promotions have had a positive impact on the UK’s mortgage industry. Overall, there has been a significant improvement in the quality of advertising material being produced on regulated mortgages, which allows consumers to make better informed decisions about the products they buy. By treating customers fairly and telling them the facts about the products on offer, the mortgage industry will benefit from a reputation for professionalism and honesty, which will result in greater consumer confidence.
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