What’s going on?
The FCA is proposing a significant review of the way that financial promotions for financial products like investments, protection and mortgages are regulated, monitored and run. The current rules are uncertain and open to interpretation about exactly who is responsible and liable for financial promotions.
You can read the consultation document, the two policy options and find out how to submit a response, here.
The deadline for submission is later this month, 12:15am on 26 October 2020
What problem is the FCA trying to solve?
Adverts that trick customers into giving their details away, financial marketing that promises fictional rates and offshore, unregulated lead generation firms who help to scam consumers out of their life savings, are becoming more common.
Especially at a time when people are losing their jobs and their incomes, there has never been a more important time to protect vulnerable consumers who go online to seek advice about financial products. However, the evidence suggests that the financial services industry is failing.
What has the FCA done about this to date?
Despite publicly lambasting Google for their failures to remove misleading adverts last month, the Financial Conduct Authority knows and accepts that they have been too slow to adapt and understand digital advertising. In admirably honest language, the ‘Regulatory Framework for Approval of Financial Promotions’ consultation states that “the FCA does not hold a definitive and up-to-date list of which authorised firms are undertaking this activity (financial promotions) at any moment in time”
In layman's terms, the financial regulator does not know which firms are approving adverts that target consumers with fraudulent and misleading adverts, it doesn't know where to start looking. This is exactly how 11,600 ordinary investors lost over £237million of personal savings when London Capital & Finance collapsed last year. Whilst the Directors of LCF used consumer mini-bonds as their own personal credit cards, they also incentivised the unregulated marketing firm Surge Financial to run aggressive and non compliant advertising campaigns and then paid the firm 25% commission on each investment secured.
How does this consultation help?
Crucially the FCA wants feedback and opinions from financial firms and professionals about how it should stop scams and shut out fraudulent advertising.
The regulator is proposing a new ‘regulatory gateway’ and has asked stakeholders for their feedback on two policy proposals. (For some more general background about the paper itself and where it came from, I wrote this piece back in July.)
This is the Contact State summary and opinion of the two policy options proposed by the consultation document:
Policy Option 1: ‘wipe the slate clean’.
The policy detail in this option accepts that the FCA has lost control over which firms are approving unauthorised firms to promote financial products, as the LCF and Surge incident proved. This option is a ‘reset’ and would require existing firms to reapply for permission to approve unauthorised adverts which would give the FCA greater insight into which firms do this work right now.
The likely effect of this option would be a significant influx of data, but it's hard to see how this actually prevents misleading advertising or makes anyone more liable. We don’t think this fixes the ‘reactive’ problem of a regulator two steps behind the firms creating financial advertising.
Policy Option 2: ‘start again and redesign the whole process’
The policy detail here proposes that approving any regulated financial promotions should itself become a regulated activity in much the same way that selling a mortgage is a regulated activity. This option would place more onus and responsibility onto regulated firms to understand what adverts are being proposed to them and would make them ultimately responsible for the customer journey and outcome.
The likely effect of this option would be that all unauthorised firms that generate financial promotions would have to be contractually regulated by their clients. It's also likely that some marketing firms (who produce lots of financial adverts) would need to become directly authorised themselves so that they could form their own opinion and take responsibility for whether an advert was compliant or not.
What would Contact State like to see happen?
We strongly believe that the regulator has the opportunity to make a lasting and significant impact on financial advertising by fundamentally changing and challenging unregulated lead generators and unapproved financial marketeers.
Both options are improvements on the current situation, however by pursuing option 2, the FCA would have a more significant impact. Overnight this measure would make firms that approve adverts directly legally liable for the actions and adverts of their unauthorised marketing partners.
The impact and effect of this would reward and encourage directly authorised marketing firms who specialise in financial advertising as opposed to marketeers who are simply good at attracting consumers to a landing page.
Crucially, both options would require regulated firms to keep better, transparent records of the lead generation partners they work with, combined with a much greater onus and responsibility for proactive due diligence. This would be a good outcome.
Why is this consultation so important?
We think this regulatory consultation is a good ‘first step’ to take back control of the approval process of financial adverts. We think the financial sector needs to take greater steps to protect vulnerable customers online and restore consumer confidence in a ‘scam free’ marketplace.
We believe that regulated firms should be more responsible for financial lead generation so that fraud and misleading adverts are easy to spot.
If you work in the financial services sector and have opinions about financial promotions and lead generators, we strongly recommend you take the time to read the consultation paper and submit your response.
Alain Desmier is founder and managing director of Contact State. The regulation technology platform helps major financial brands and marketeers navigate financial compliance, data regulation and digital advertising intelligence.