FSA and OFT are coming to get you!
Yesterday a report that the Association of Mortgage Intermediaries (AMI) has produced a non-conforming (sub-prime) financial promotions fact-sheet caught my eye. Earlier this month the FSA release an update on its financial promotions work [available here in PDF format].
The report included information on the future direction of the regulator’s work, outlining a number of key areas it would focus on. One of these was the financial promotion produced by mortgage intermediaries, in particular non-conforming promotions from small broker firms.
In light of the upcoming focus in this area, AMI’s fact sheet covers the FSA’s specific financial promotions requirements and outlines the common errors the regulator has uncovered in non-conforming (sub-prime) promotions.
It’s pretty obvious that given that the OFT and FSA are joining forces to look at consumer credit advertising, it is only a matter of time before a similar report is produced for the secured loans market. In light of this I’ve taken the full FSA report mentioned above and extracted the points relevant to Sub-Prime brokers. It is my feeling that more or less exactly the same can be said (and will be said) for the secured loans market.
Here’s the extracts :-
Extract One
Sub-prime brokers
This is an area in which failures in the standards of financial promotions present a higher risk given that the target audience is potentially more vulnerable.
We observed limited improvement in the standard of promotions. We continue to see many firms which appear to be making no attempt to issue clear, fair, not misleading promotions, and other firms which have attempted to do so but fail through an apparent lack of understanding of mortgage regulation.
Common failings identified at baseline in 2005 included:
o Omission of the Annual Percentage Rate (APR);
o Incorrectly calculated APR;
o APR not being prominent enough;
o Lack of or inaccurate risk warnings;
o Risk warnings not being prominent enough;
o Lack of or incorrect fee disclosure information; and
o A failure to include a description of the drawbacks associated with a benefit described (e.g. after a promotion claims to reduce monthly payments, it should also describe any increase to the total term and overall interest payable).
After introducing the new regulatory regime, with our increased emphasis on financial promotions, we have communicated our concerns to as many of these firms as possible. We did this both through general communications (e.g. through our specific financial promotions bulletins, communications to small firms) and also through letters to firms.
We will continue to work with the industry to improve overall standards. However, we will also identify and deal with the worst firms - for example, those that continue to issue misleading promotions or those whose promotions suggest a lack of awareness of our requirements. This includes using formal enforcement powers where appropriate.
Extract Two
Mortgage brokers
A major challenge for us is to improve the standard of promotions by smaller firms, particularly within the sub-prime mortgage market. The target market for sub-prime lenders tends to be the more vulnerable consumer. So far, we have addressed these through educational material, guidance notes and on a case-by-case basis. We shall be focusing on ‘repeat offenders’, more serious breaches, those firms not showing sufficient awareness of the requirements imposed by regulation and, if necessary, taking formal enforcement action.
Extract Three
In terms of overall progress, 52% of investment promotions we reviewed in 2004 fell below the standards we expect. This figure now stands at 32%. But we have seen only limited improvements in the general insurance and sub-prime mortgage sectors. We expect firms, particularly those operating in these sectors, to take a critical look at their promotions and systems in the light of our findings and to take action to improve.
It’s interesting to note - given that the FSA has only recently taken responsibility for sub-prime mortgages and insurance - that it isolates them in the report.
