The vast majority of financial services promotions are misleading, new research from financial advisers Grant Thornton claims.
The firm says 76% of financial promotions fail to meet the Financial Services Authority's (FSA) standards and in some cases are wildly misleading.
Grant Thornton reviewed a sample group of 117 financial promotions from 94 financial services companies ranging from newspaper adverts to websites and other literature during the latter part of 2005.
It found firms advertising deals or cheaper premiums for headline “grabbing purposes” which were not available in practice with more expensive premiums being quoted when researchers telephoned the companies in question.
It also found the use of scare tactics by firms with financial promotions telling consumers “One in three people will get cancer in their lifetime” but then failing to inform them that particular policies did not cover some forms of cancer or that many of the causes of cancer cited were likely to affect people of an age for whom the policy would not be suitable or eligible.
Many financial promotions reviewed also failed to include risk warnings, as required by the FSA, that income from investments might be subject to tax or that the value of funds could go down as well as up.
There were also claims made by mortgage lenders that they offered the best rates or that mortgage rates are at their lowest in years, when rates have in fact risen since 2003.
Mortgage lenders were also guilty of using a wide range of confusing jargon, according to Grant Thornton, such as MVR, LTV, IVA and CCJ or descriptions such as "core plus satellite."
Grant Thornton adds there was still an excessive use of small print in the financial promotions it reviewed.
The criteria used by the FSA to assess financial services promotions include:
But there are specific rules for mortgage, general insurance and investment products that allow the rules and guidance to be tailored to the products being advertised.
That said, the research found significant flaws in 84% of all retail investment promotions and 81% of mortgage promotions. Insurance advertisements and promotions fared slightly better with 61% being found deficient.
Ian Gorham, a partner within Grant Thornton's Financial Markets Group, says: "The fact that three quarters of all UK financial advertisements and promotions that we scrutinised did not meet the requirements is highly disappointing, and even more so given some of the serious examples we found. These flaws are driven by intense competition to attract customers, but the UK financial services industry has had enough recent scandals in areas such as pensions and endowments, and it is time to adopt the necessary checks and balances to give investors the correct information."
"It is absolutely critical that the industry takes the FSA requirements more seriously," he continued.
Gorham says companies appear too eager to inform potential customers of the benefits of their products without outlining the finer details of the risks involved or the commitments required.
He says 65% of mortgage promotions and 58% of retail investment promotions were not clear enough about the product or service provided, whereas insurance promotions received a 92% pass rate.
When it came to outlining appropriate risk warnings, 76% of retail investment advertisements and 51% of mortgage advertisements failed to raise investors' awareness of associated risks, whereas only 24% of insurance promotions needed to further outline risk warnings.
Percentage and headline claims saw 57% of mortgage promotions and 54% of insurance promotions fail the FSA's criteria. But only 4% of investment promotions made false claims in this category.
And 61% of insurance promotions, 30% of mortgage promotions and 21% of retail investment promotions were guilty of making potentially misleading statements to investors.
Meanwhile 42% of retail promotions and 34% of mortgage promotions failed to explain the appropriate charges and penalties that could apply to the product.
Gorham says: "Advertisers need to play by the rules and not exploit a lack of awareness among their target market. While the FSA does use financial penalties for organisations breaching its criteria, companies must also consider the long term damage to the reputation of their brand, the loss of trust in the eyes of their target market and the potential to build up a large population of people who have bought a product under false perceptions, leading to a need for costly revisit and redress exercises."
Gorham adds the research will not be naming and shaming specific financial services firms as he believes the issue of financial promotions to be a widespread industry problem. But Grant Thorton will be passing its research onto the FSA within the next week for its consideration.
Meanwhile David Whitely, a spokesman for the FSA, reiterated the regulator's guidance on financial promotinons saying: "Our financial promotions rules require firms to produce material that is clear, fair and not misleading and that provides a balanced picture of the product or service. The marketing must match what the product or service delivers, and the promotions must be easily understood by customers."
Whitely adds: "This is a major priority area for the FSA and we devote much resource to communicating our requirements to firms and acting on bad practice when we see it. A consumer's initial impression of a product can inform their subsequent decision-making to a great degree so it is important that firms produce promotions that help consumers make the right choice about the right product at the right time."
He also warns that where the FSA sees non-compliant financial promotions, it can immediately have the advertisement withdrawn and that it would not be afraid of using its enforcement powers where appropriate.
"We will also intervene to ensure that customers who may have been unduly influenced by a non-compliant promotion are offered redress without having to bring our enforcement powers into play," he adds.If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Matthew West on 020 7484 9893 or email [email protected].
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