Consumer credit products - are your promotions clear and fair?

Posted: 13th January 2014

If your customers could only hear about your products in controlled environments from your staff, it might take a while to build up a large customer base. In the main it is through marketing – financial promotions – that customers first learn about products and start the process of choosing whether to buy them.

The Financial Conduct Authority (FCA), the consumer credit industry’s new regulator, come April 2014, has a sizeable team dedicated to reviewing firms’ financial promotions. The regulator has learnt from the past that intervening early in the customer journey is key to achieving good customer outcomes to make markets work well. Since the customer journey often starts with promotions, the regulator’s focus makes sense.

FCA: current view

• All financial promotions are expected to comply with principle 7: communicate with customers in a way that is clear, fair and not misleading
• Equal prominence must be given to both the positive and negative features of a product or promotion. Firms advertising positive features on their website and sharing potential negatives after the contract has been signed have received fines in the past
• The FCA will require suppliers of high-cost short-term (HCST) credit to apply a risk warning for payday loan adverts. The proposed warning:

“Think! Is this loan right for you? Over two million short-term loans were not paid off on time in 2011/12. This can lead to serious money problems. If you are struggling, go to http://www.moneyadviceservice.... for free and impartial help.”

• The FCA can require firms to change or remove existing promotions with immediate effect
• All adverts that include an incentive must clearly declare the APR. Speed of granting credit is considered an incentive
• Cold calling and other unsolicited marketing must comply with existing FCA expectations. The FCA has said it may consider banning cold calling for high-cost short-term credit in the future

Price cap impact?

Firms in the HCST lending space will need to consider what impact the FCA’s impending announced cap on the total cost of credit will have on their financial promotions. Clearly the primary focus of reactions to this legislative change will be in the business model and product design; but how products are marketed and sold is critical to the journey. The “clear, fair and not-misleading” rule will not go away.

Firms outside of HCST lending will need to consider the prospect of the FCA extending the requirements on HCST credit to include wider lending when defining risk appetite. If too many firms are “sailing close to the wind”, the FCA may consider tightening the regime further still.

Compliant promotions in practice

The FCA requires a well governed and risk-based approach to product governance taking account of the intended customer and the quality of the promotion. Review your financial promotions internally – or independently – to ensure your firm focusses on fairness, clarity and avoids being misleading, whilst providing excellent customer experience.