ABI resource pack for financial promotions. November 2005

Transcription

1 ABI resource pack for financial promotions November

2 What is a resource pack and why has the ABI produced one? Our aim with the material contained in the pack is not to replace FSA requirements or to place new obligations on firms that go beyond the FSA Handbook. Our purpose is to help and improve customers experience of the industry. The resource pack has been developed to assist firms in meeting their responsibilities to provide clear, fair and not misleading financial promotions. It is intended to help firms in their promotional activities but is not intended to be a rigidly prescriptive checklist. There is no assumption that all firms are currently following all the practices set out in the pack and there is no expectation that they should necessarily do so in the future as the resource pack is intended as a practical tool, on which companies should draw in light of their own circumstances. We see a number of possible uses for this material: as a benchmarking tool for firms which allows them to gauge their own processes and practices against current industry best practice, and to identify for themselves any further work they may wish to do. It is also a tool that can be used as firms develop their financial promotions work in conjunction with the FSA s wider TCF agenda; as a statement for the public and policymakers of the industry s collective view on best practice and of our intention and willingness to improve; and a how to guide that expands on the requirements of the rules, offers practical suggestions in areas where there are no FSA case studies/where the existing case studies aren t broad enough, and in a style and to a depth that FSA find difficult to encapsulate without consulting on and issuing formal guidance. The FSA is supportive of this initiative. 2

3 The ability to develop and promote products for target customers, based on a clear understanding of their likely needs and capabilities is one of the key elements of the ABI s 5-point plan to boost confidence in long term savings. It is also a central component of the FSA s Treating Customers Fairly agenda. The following resource pack has been drawn up by the ABI s Financial Promotions Working Group to assist firms in meeting their responsibilities to provide clear, fair and not misleading financial promotions. It is intended to help firms in their promotional activities but is not intended to be a rigidly prescriptive checklist. There is no assumption that all firms are currently following all the practices set out in this pack and there is no expectation that they should necessarily do so in the future as the resource pack is intended as a practical tool, on which companies should draw in light of their own circumstances. The pack contains the following elements: A risk assessment The risk assessment outlines a series of considerations that a firm may wish to take into account before and during the financial promotions process. Firms need to think about the risks inherent in the product they are promoting, and what difference the context of the promotion will make to how consumers interpret it (e.g. whether they get advice, how financially literate they are, their understanding and experience of the brand, the other marketing and regulatory material they will be given, and how likely they are to read it) Good practice on processes and measures The good practice on processes and measures is intended to help firms identify the types of mechanisms they may like to consider employing in their financial promotions processes. This is intended to provide useful, practical examples for firms it is not intended to prescribe a specific process that a firm should undertake. This section of the pack has been developed in the light of members own experiences and shared knowledge, to help improve standards in the area of financial promotions. It sets out examples of the type of practical framework through which a firm can demonstrate and evidence strengthened senior management oversight, a robust promotional process and clear lines of accountability. Good practice guidance for product specific promotional literature: with-profits and structured products The pack contains good practice guidance for with-profits, structured products and equity release products promotional literature. They offer guidance as to what information firms should consider when designing a with-profits, structured products and/or equity release promotions to ensure that a balanced picture of the product is given. The guidance also distinguishes between what aspects are mandatory under FSA rules and what are considered best practice. Firms should remember that each individual promotion does not need to include all the information outlined in the guidance. 3

4 Risk assessment for financial promotions This section highlights the key risks firms should consider before and during the process of promoting a product. In particular cases there may be additional risks relating to a specific product and depending on nature and complexity of the promotion, firms should use a proportionate form of risk analysis/assessment, alongside the benefits to consumers and brand of adopting good practices. Firms will want to take into account the cost implications of such an assessment. Considerations Target market: Prior to defining the target market, firms should have an understanding of general trends in the market and of the customer need they are seeking to meet. Having done this, firms should define and record a target market segment for the product and be satisfied that the promotion is likely to be suitable for the defined target market What is the target market for the promotion? How has the target market been identified? Why has it been chosen; how does it fit with the firm s general position? Have the needs of the target market(s) been identified and how? How familiar will they be with the product and company? What will customers think if they read/hear/see this promotion alongside more product-specific promotions? Promotion aims/objectives and risks: Firms should be satisfied about what the product aims to deliver and that it is designed to deliver those aims. It should ensure that the promotion is suitable for the product. Identify the general aims and objectives of the product. What customer needs is the product intended to meet and does the promotion address this? Identify the general risks associated with the product or class of product. Does the promotion clearly address these? Does the promotion make any additional, contradictory or confusing claims? 4

5 Does the promotion address the key risks to the target market? [e.g. the risk to consumers of buying a product that they don t understand if they do not get advice, the risk to consumers of changes in the wider environment and to changes in their circumstances] Are you using the right media for the promotion? Does the medium make it likely that non-target market customers will read the promotion? Have you considered the promotion in conjunction with distribution approach (i.e. Direct sales, Direct offer, IFA, execution only etc) and in particular whether advice is given? Given your assessment of the risks of the product, are you satisfied that the content of the financial promotion reflect these risks? Is the promotion balanced? Is the commitment involved in investing in the product clear? Are you comfortable that the legal and technical interpretation of the product likely to be inferred from the financial promotion material is identical to what the actual legal interpretation of the product is? Have you considered the potential impact of any imagery used in the promotion? Is it appropriate? Could it give the customer an unrealistic expectation as to what the product or service delivers? Customer understanding of the product: The target audience should, with suitable information and advice, be capable of understanding the key elements of how the product works, including its risks and charges. If they are not getting advice, how familiar will the target audience be with the technicalities and financial terms relating to the product? Have you described the product or service in words that the target audience is likely to understand? Have you explained all technical terms where appropriate/avoided them where 5

6 possible? Are the key risks as well as the main benefits explained in a way that is clear and balanced to the target market? What expectations will customers form from the promotion? Are they right? Have you ensured that charges and penalties are always transparent and capable of being understood? Have you considered the potential impact of any imagery used in the promotion? Is it appropriate? Could it give the customer an unrealistic expectation as to what the product or service delivers? Research Prior To Launch: The promotion should be researched before launch to ensure that it is the appropriate medium to optimise consumer understanding. Firms will want to take into account whether they are undertaking a promotional campaign or developing an individual financial promotion and whether the promotion relates to a new product. What research exists in relation to the target market? What research exists in relation to the proposed promotional material? If none, what quantitative and qualitative research will be undertaken? Has a similar promotion attracted press or FSA comment? Has the possibility of a pilot exercise been considered, e.g. Are you intending to test the promotion with the potential target audience? What do your staff make of the proposed promotion? Has your firm or others offered similar products previously and if so, with what outcome? How will you judge and measure the success of a promotion? Have there been any complaints about similar types of promotions? If so, what action has been taken to ensure that this promotion does not give rise to a 6

7 complaint? Post Campaign Review: The success of the promotion should be reviewed against its initial objectives and, if appropriate, any remedial action considered to correct any perceived shortfalls Has the promotion reached its target market? Has it reached anyone else? Is a monitoring strategy in place? What are the key management information (MI) indicators that will be tracked and how regularly? Is any qualitative monitoring needed? Where sales targets have been exceeded, does this imply any conflict with compliant sales? Post sale, what is the level of complaints and are there any common themes as to the cause? Has the promotion or marketing campaign attracted any comment from either the regulator or competitors? What has been the level of persistency for each distribution channel? Is there a mechanism for reviewing existing campaigns against: Evolving regulatory requirements Firms changing strategy Risk of product becoming obsolete in its market Changing economic environment 7

8 Good practice on process and measures This section is intended to help senior management identify the types of mechanisms their firm may like to consider employing in their financial promotions process and help managers design and use the right management information for their business. It is intended to provide useful, practical examples for firms not to prescribe a specific process that firms should undertake. Overall process Measures Firms might consider whether to develop a process map to ensure that the financial promotions process is being followed and is reproducible. Any map produced should be reviewed periodically. Firms should ensure that all relevant persons have the process map and are familiar with it Promotions should be reviewed periodically to ensure the process map is being followed. Review meetings and reports to senior management and the Board throughout the promotional process Management Information (MI) should be a central component to the systems and controls, so companies are able to communicate what good looks like and deliver it. Key MI measures should be identified from the outset to cover the entire promotional process Where necessary Management Information (MI) should be both qualitative as well as quantitative. It should also include elements of commentary as well as data MI could include: Average premiums Volume of Business Volumes of complaints and SMART analysis (including underlying causes) Persistency measures (e.g. lapses, paid up transfers) Reject rates Data coming out of suitability checks Actual sales vs. mailing (and vs.target) 8

9 Firms might consider whether to have in place a properly authorised process, with appropriate involvement from Approved Persons. There should be: Volume of sales through each distribution channel Regulatory feedback (of whatever nature) Data/measures on customer comprehension and response rate Call centre enquiry traffic (e.g. have consumers read the literature) Number of applicants who use the cooling off period to change their minds Reasons for people changing their minds Analysis of emerging issues Evidence of action taken since the last report to address the issues raised a clear and documented line of accountability through the promotional process clear definitions of who is responsible for which elements of the process clear responsibility for any external agencies involved an audit trail for approvals, justifications etc Legal, actuarial, compliance and technical experts could be involved in the process where appropriate. Approvals staff could also be involved early in the process Where appropriate governance agreements could be set up between the parties involved in the process to ensure effective delivery and support Firms might consider whether to have appropriate checklists to ensure that internal vetting processes are properly documented Firms might consider having a training and competence scheme for approvers Firms might consider organising specific training for staff (marketing, compliance and/or distribution) which is focused on understanding the specific product and the consumer risks involved. Targets could be set for staff training 9

10 Firms might consider whether to have a process for the promotional literature for high risk products The process could include ensuring that all material is double checked by at least 2 different staff and that material is reviewed at a more senior level. Consider whether the sign-off process ought to take account of and record research findings pre-launch Firms might consider whether to have in place a clear post-campaign monitoring strategy that recognises the risks identified and records MI against these risks accordingly Collect and analyse customer and IFA feedback Consider giving promotions expiry dates with processes to trigger withdrawal of the material if appropriate Specific elements of the process Measures Target market Firms might consider whether to undertake market research to define their target market. Having done this the information needs of the target market should be identified Firms should be able to evidence that the target market has been defined and their needs identified and that this has been approved at a senior level Risk management Firms might consider whether to develop a risk rating system for their financial promotions process which takes into account the risks identified and addresses them Firms should be able to evidence their risk rating process Promotional literature Firms might consider whether to test promotional literature to ensure that it Firms should be able to evidence the fact that consumers understand the 10

11 clearly explains what the product does and presents a consistent and balanced picture of risks throughout the financial promotions process. Firms will want to ensure all promotional material is written in clear, plain English promotional literature, and that important messages aren t lost by the use of images etc Firms should be able to evidence where literature has failed to make it through the process, the reasons why it was stopped and any action taken Firms will wish to ensure that any imagery (including pictures, graphs and tables) used in promotional material is appropriate and factually correct Post-campaign review Firms might consider whether a clear programme for post-sale review should be implemented with the results fed back into the internal promotional process There should be clear ownership of the review process within the firm Telephone sampling of applicants should be undertaken to ensure the promotion has successfully targeted the chosen market Firms should have identified clear triggers for action post-sale There should a regular monitoring of promotional material to ensure it is still relevant 11

12 Guidance for ensuring balance within financial promotions for withprofits products The FSA considers that balance within a financial promotion is an important part of ensuring that consumers are not misled or likely to have unrealistic expectations of a financial product or service. The FSA Handbook contains rules and guidance on the need for a fair and balanced picture to be given of the nature of the investment, the commitment and the risk involved in order to ensure that the financial promotion is clear, fair and not misleading. One of the desired outcomes is that a financial promotion should not accentuate the potential benefits of a product without giving a fair indication of the risks or potential drawbacks. Substantial guidance on what is required is contained in the FSA publication FSA s Regulatory Approach to Financial Promotions and in Chapter 3 of COBs especially Annex 4. As the FSA make clear not all of the financial promotions rules apply to all promotions. It is for firms to identify and apply rules in the Handbook which are relevant to a particular promotion 1. The following is some practical guidance as to what information firms should consider when designing a with-profits promotion to ensure a balanced picture of the product is given. The guidance also distinguishes between what aspects are mandatory under FSA rules and what are best practice. It is possible that the underlying with profits fund and the product will be promoted separately even within one financial promotion so the guidance has been split along the same lines. The first point that must be made, that equally affect promotion of the fund and/or the product, is that any balancing statement cannot be hidden within the financial promotion and must be linked to the potential benefit it is balancing and be of equal prominence. 1 Financial Promotions: taking stock and moving forward, page 12, FSA, February

13 Promoting the underlying With Profits Fund Investment risk Fund structure Past Performance Appropriate Comparisons Smoothing of Returns Appropriate warnings relating to the investment risks depending upon the asset allocation of the fund. Potential for loss of capital and the potential use of MVRs. Where there is the potential for a reduction to the payout, the reasons for each of the possible adjustments should be explained with a description of the circumstances when each may be applied. The explanations should be given due prominence. The with profits fund should not be referred to as the best of both worlds implying that investors will benefit from all of the security of a deposit account combined with all the growth potential of stock market investments Signpost to other material e.g. CFPPFM which provide a description of what a with profits fund is in a language that the customer is likely to understand. This may include reference to asset allocation. Standardised past performance in line with COBs to be used Past performance information not to be more prominent than other product information Past performance caveats to be included Past performance not to be linked to potential future prospects and therefore not leading to unrealistic consumer expectations Explain that there will be an additional layer of charges on the product Standardised past performance to be used Past performance caveats to be included Source of the figures to be included Access to capital and capital at risk statements to be included where appropriate Comparison must be appropriate to the product being promoted Clear and understandable explanation of the smoothing process to be included Best Practice Best Practice All All Best Practice PPFM/CFPPFM Brief description of what it is and its availability to be included Bonus Rates Where they are included, a statement that future bonuses/bonus rates are not guaranteed should be included Use of figures Should be kept to the minimum possible Best Practice

14 Tax The tax position should be explained covering, where appropriate, the fact that the fund pays corporation tax and thus deemed to have paid tax at the basic rate. How the tax position will impact on non, lower, basic and higher rate tax payers. Best Practice Promoting the Product Investment Risk Appropriate warnings relating to the investment risks depending upon the asset allocation of the fund Potential for loss of capital and the potential use of MVRs The with profits fund should not be referred to as the best of both worlds implying that investors will benefit from all of the security of a deposit account combined with all the growth potential of stock market investments Best Practice Investment Term The promotion must indicate the appropriate term of the product and where the product is set up as a whole of life contract that it is not suitable for a short term investment ( minimum five years ) Charges Product charge information should be included Capital Guarantees Product Flexibility Past Performance Precise details of when the guarantees are effective plus an explanation of what would happen at all other times (possibly get back less than paid in, MVRs etc) Where there is the potential for a reduction to the payout, the reasons for each of the possible adjustments should be explained with a description of the circumstances when each may be applied. The explanations should be given due prominence. Where the product flexibility is being promoted (such as premium level and frequency variation), then the consequences/downsides should also be included Standardised past performance in line with COBs to be used Past performance information not to be more prominent than other product information Past performance caveats to be included Past performance not to be linked to potential future prospects and therefore not leading to unrealistic consumer expectations All Appropriate Comparisons Standardised past performance to be used Past performance caveats to be included Source of the figures to be included Access to capital and capital at risk statements to be included where appropriate All

15 Smoothing of Returns Comparison must be appropriate to the product being promoted Clear and understandable explanation of the smoothing process to be included Best Practice PPFM/CFPPFM Brief description of what it is and its availability to be included Bonus Rates Where they are included, a statement that future bonuses/bonus rates are not guaranteed should be included Use of figures Should be kept to the minimum possible Best Practice Tax The tax position should be explained covering, where appropriate, the fact that the fund pays corporation tax and is thus deemed to have paid tax at the basic rate. Whether the policy is a qualifying policy, and the effect will the tax position will have on non, lower, basic and higher rate tax payers. Best Practice

16 Guidance for ensuring balance within financial promotions for structured products The FSA considers that balance within a financial promotion is an important part of ensuring that consumers are not misled or likely to have unrealistic expectations of a financial product or service. The FSA Handbook contains rules and guidance on the need for a fair and balanced picture to be given of the nature of the investment, the commitment and the risk involved in order to ensure that the financial promotion is clear, fair and not misleading. One of the desired outcomes is that a financial promotion should not be designed so as to accentuate the potential benefits of a product without giving a fair indication of the risks or potential drawbacks. Substantial guidance on what is required is contained in the FSA publication FSA s Regulatory Approach to Financial Promotions and in Chapter 3 of COBs, especially Annex 4. For structured capital at risk products, there is also guidance in COB E. As the FSA make clear not all of the financial promotions rules apply to all promotions. It is for firms to identify and apply rules in the Handbook which are relevant to a particular promotion 2. The following is some practical guidance as to what you should consider when designing a structured product financial promotion to ensure that a balanced picture of the product is given. The guidance also distinguishes between what aspects are mandatory under FSA rules and which are best practice. The first point that must be made is that any balancing statement cannot be hidden within the financial promotion and must be linked to the potential benefit it is balancing and of equal prominence. Definition of a Structured Product A Structured Product is a financial product that provides some exposure (either directly or linked) to equity, or other, market, and which provides some protection to capital and/or income. The returns available from the structured product may be based on pre-set formulae exposing the customer to a range of outcomes and are aimed to provide a pre-set level of regular income or capital growth. A structured product will usually require a lump sum investment to be held for a fixed term. Notes: This definition could cover a with-profits policy, but with-profits policies are not within the scope of this document. In addition, CPPI products have not been considered for the purposes of this document although we intend to issue a revised version incorporating this class of investments at a later date. 2 Financial Promotions: taking stock and moving forward, page 12, FSA, February 2005

17 Nature of product Explain, in easily understood terms, the nature and investment of the Structured Product being offered. Such explanation should make clear to the potential customer where the monies will be invested and that these will usually be held for a fixed term. Any guarantees of income or capital should be transparent, together with the investment criteria that control such returns. Avoid displaying guaranteed returns in gross terms if the customer cannot obtain the returns quoted due to the underlying funds of the investment being taxable and not recoverable by the individual. Best practice Investment risk Explain, in detail, if the rate of growth or income advertised depends on specified conditions being met. Explain, in detail, how the exposure to markets is calculated, identifying any risk to capital and disclosing this prominently. Explain, in detail, how any capital protection is calculated and be clear regarding the cost to the customer of the protection and how it is imposed. Provide details of any other features for example, early payouts or lock-ins, and how they are triggered. Provide a clear warning if the products invests in high risk investment categories e.g. non-investment grade bonds Market performance Provide details of how any averaging of market performance is calculated avoiding the implication that this provides protection against late market falls where the averaging is for 6 months or more. Explain that where averaging is for 6 months or more, the effect of averaging is likely to be to constrain potential growth Provide examples of the effect of any averaging in different market scenarios. Provide examples of the outcomes in various market scenarios enough to cover a broad range of different scenarios. Ensure that any spread of examples do not suggest unreasonable market returns and balance any high growth rates with low or negative market returns. Best practice Best practice

18 Counterparty risk If the returns, or capital protection, depend on a counterparty meeting its financial commitments, highlight at an early stage that the returns are not guaranteed, and depend on the counterparty meeting its financial commitments. Investment term If the protection or the maximum benefits only apply if the product is held to a specific date, or dates, highlight this at an early stage. Indicate how the return will be calculated if the product is encashed early, including any redemption penalties. If the investment is likely to be difficult to sell before its maturity date, make this clear to the customer. If capital withdrawals are not possible or possible only in limited circumstances, make this clear to the customer. Best practice FSA information Provide contact details for the FSA s consumer helpline and website. Include either the FSA factsheet Capital-at-risk products or the information contained in it where the nature of the specific structured product type warrants this. Guarantees Give equal prominence to both guaranteed and non-guaranteed benefits. If appropriate, provide details of the guarantor and details of the guarantee (i.e. where it is not the insurance company) If the initial capital is not guaranteed explain that the customer may not get back what they invested, and that they should not invest unless they are prepared to lose some, or all, of their money. Don t use product names, or subtitles in promotions that imply a level of protection or return that does not exist. Best practice Best practice Risk warnings Ensure all risk warnings are clear and relevant to the structure of the investment. Do not promote the maximum benefits as a feature if the investment conditions needed to achieve this would require higher growth assumptions than the FSA allow.

19 Explain the effects of early surrender Communications to investors Ensure that charts and projections are balanced and comply with FSA rules and guidance. Highlight the content and frequency of periodic communications to investors. Avoid expressions such as stock market growth or growth of the FTSE index if the product will not be investing in all the stocks that make up the index. Promotion of a product that is linked to growth in a stock market index should make clear if it does not include an allowance for any return or re-investment of dividend income. Promotions should therefore make clear where references to stock market exclude any form of income payment. Ensure that all implicit charges are clearly explained to the customer. If there are no explicit charges, explain that charges are worked into the price of the product Best practice Best practice Consumer understanding Consider the background and level of financial awareness of consumers who are likely to read the promotion. Provide the level of information that such consumers are likely to need to understand the products and any risks involved. Describe the product using words that such consumers are likely to understand. Concentrate the promotion on the impact to consumers. Provide information on the detailed structure less prominently Best practice Key Features Document Provide a standard format Key Features Document even where this is not required by FSA rules. Best practice