In brief - Providers of financial products, services and advice must avoid misleading consumers
The Australian Securities and Investments Commission (ASIC) has set its sights on advertising of financial products, services and advice "in any medium and in any form". This has significant implications for all participants in the financial services industry.
Future of Financial Advice Bill (FOFA) proposed to commence on 1 July 2012
On 22 March 2012, the Federal Government's proposed Corporations Amendment (Future of Financial Advice) Bill 2011 was read for a third time in the House of Representatives. Although at the date of this article the Bill has not yet received assent, it is set to become an Act of Parliament which would come into effect on 1 July 2012.
In the midst of the reform process, the Australian Securities and Investments Commission has released a series of Regulatory Guides which will guide or direct the actions of the financial services industry. In particular, the new Regulatory Guide 234 - Advertising financial products and advice services: Good practice guidance (RG 234) has now been issued to assist the industry.
Who is affected by the rules related to advertising financial products and advice services?
Anticipating the onset of tighter regulations for the financial services industry, ASIC has issued a number of new Regulatory Guides which are designed as supplementary regulations in addition to the legislative framework.
RG 234 applies to advertising of financial products and financial advice services. It can apply not only to financial product promoters or providers, but also to product issuers, financial advisers, distributors, agents and publishers of financial product promotions. However, this list is not exhaustive. The regulations may apply to other persons or entities falling into one of the broader categories above if they advertise a financial product or advice service in any way.
What is advertising?
Despite the potentially broad scope of the word "advertising", ASIC unfortunately does not provide guidance on exactly what constitutes an "advertisement" for the purposes of the legislative framework. The standard definition of an advertisement involves public notice, generally of something for sale. It does not necessarily have to reach a particular number of persons.
ASIC does not set out what particular types of advertisements may be regulated. The potential areas that ASIC can police may extend to "any medium in any form". This includes:
- television advertisements
- print media
- internet advertising
- billboards and static advertising
- mail outs (direct advertising)
- presentations or seminars
- any other form of advertising such as telemarketing or text messaging
Internet advertising of financial products and services
The category of "internet advertising" is particularly broad and constantly evolving. In the absence of specific guidelines from ASIC, internet advertising may include website banners, pay-per-click advertisements on Google results pages, listings on classified advertisement websites, chat room postings, "tweets" on Twitter, marketing emails, content of any type on a company's Facebook page, clips posted on YouTube and "editorial" content on a company's website. A financial services provider's website as a whole could also be viewed as an "advertisement" in the public sphere if it proffers goods or services.
It is worth noting that in certain circumstances, companies may even be held liable and fined for postings by third parties on their Facebook wall. Given that internet advertising is such a broad category, those who advertise financial products or services would do well to tread with caution.
Why does ASIC regulate advertising?
In many industries, the mode, style and content of advertising is limited and restricted. A number of products and services in everyday life are considered to be inappropriate for the public sphere or are otherwise restricted to particular audiences.
One of ASIC's roles as a corporate regulator is to police infringements of the legislative framework. When it comes to advertising, the key issue scrutinised by ASIC will be misleading statements.
False or misleading statements
For financial service providers, false or misleading statements are principally spelt out in section 1041E of the Corporations Act 2001 (Cth). Under that provision, a false or misleading statement may lead to a civil or criminal penalty if it is:
- materially false or misleading, and
- is likely to induce persons to apply for, dispose of or acquire financial products or to affect the price for trading in financial products or markets, and
- the person making the statement does not care whether it is true or false or knows or ought reasonably to have known that it was materially misleading.
Although there are a number of different factual situations that may lead to a statement being materially false or misleading, ASIC sets out a number of questions it will ask when determining whether an advertisement is materially misleading, such as:
- Does it clearly and accurately describe a particular product?
- Does it paint a clear and balanced picture?
- Are risks, fees and drawbacks clearly described and presented?
- Can it be presented in a simple and clear way or are its attributes too complex?
- When dealing with advice, does it create a realistic impression of what the advice is likely to achieve, cover or address?
- Are the limitations of the advice clearly identified?
- Are costs realistically presented?
This list is not exhaustive but may provide initial guidance for financial product and advice providers, issuers or supporters when contemplating the theme, atmosphere and presentation of their advertising.
It will be relevant to ask these and other similar questions before putting out an advertisement given the tighter regulation of the financial services industry.
Particular issues to consider in financial product and advice advertising
The financial services industry advertises a vast array of different products. Many are similar, though many of those will have minor idiosyncrasies or disclaimers attached. A Product Disclosure Statement (PDS) of some hundred pages is often off-putting for a consumer at first blush. However, without reading that document, a consumer may miss an opportunity to invest in a potentially appropriate or useful financial product.
A problem faced by financial advertisers is that there has historically been little or no guidance as to what information should be packed into an advertisement and how. RG 234 sets out a detailed list of "good practice guidance" for particular aspects of financial products. For instance, it deals with how and where it may be appropriate to use industry jargon.
Although a comprehensive review of each "good industry guidance" topic is beyond the scope of this overview, we have recounted a summary of those individual topics below. In total, RG 234 covers ten broad topics. Most of the topics involve a common sense judgment call and we note that none of the summaries below should be treated as comprehensive or interpreted as legal advice.
1. Returns, benefits and risks
- Where a particular return or benefit is claimed, the advertisement must also include a warning of the risks or drawbacks involved with the product or advice.
- Any features that are claimed to be available for that product or advice must be reasonably available to a consumer.
- Open-ended promises about benefits should be avoided.
- If a benefit is only available for particular clients or for a certain time, this must be made clear.
- The "tone" of an advertisement must not undermine the existence or extent of risks (such as an overly positive outlook on a high-risk product).
- Prominent warning should be given of unexpected risks.
2. Warnings, disclaimers, qualifications and fine print
- Headline claims should not be misleading or inconsistent with warnings.
- Statements referring a consumer to a PDS or other part of a website are not sufficient to negate a false or misleading statement. This is a common issue for a number of website advertisements or other media where a PDS cannot sensibly be packed into the space of a small advertisement. As noted below, the advertising medium should then be reconsidered.
- Warnings should be in a similar form to the main body of the advertisement and generally not in "fine print" at the bottom. Warnings must remain clear and prominent enough to be read and understood.
- Qualifications should be published at the same time as the advertisement, not later.
- Strong headline claims may be misleading despite a warning; it may be best to avoid overemphasising benefits in a headline.
3. Fees and costs
- Where fees or costs are referred to in an advertisement, they should be presented by way of a realistic overview of the overall level of fees or costs likely to be paid by a consumer.
- If there are "other" or "semi-hidden" fees involved, those must be disclosed and it must not be represented that they do not exist.
- It should be clearly stated what effect the fees or costs may have on the financial product, such as disclosing a variable fee rate dependent on the size of an investment.
- Where providing advice services, avoid representing that an advice service is "free" or "low-cost" if there are actually other product fees or commissions payable. Those must all be disclosed.
4. Comparisons with other financial products
- Products with sufficiently similar features may be compared, but highlighting one feature while ignoring another feature may be misleading (for instance, mentioning a percentage return for one product while omitting the percentage return on another).
- When advertising differences in projected outcomes, these ought to be accurate and relevant. Projections should be consistent with reality for a reasonable period of time.
- It is not good practice to compare dissimilar products, as ASIC may treat this as misleading.
- Comparison of benefits and returns ought to be carefully assessed prior to making statements, especially where returns may only be likely in certain circumstances.
- Where using a rating prepared by a research house this ought to be explained and should be accompanied by data on where to find further information on the particular rating. (Please see our earlier article Research houses to be more tightly regulated under proposed ASIC reforms.)
- If claiming an award such as "Financial Planner of the Year", the source of the award must be identified and explained. It should be stated whether or not the award is current.
5. Past performance and forecasts
- Past performance, which often becomes an issue for financial predictions, should "unambiguously and without reservation" point to the fact that past performance is not indicative of future performance.
- Forecasts of performance must be based on reasonable grounds or they may be considered misleading.
6. Use of certain terms and phrases
- Certain terms such as "free", "secure" and "guaranteed" should be used carefully since their technical meaning may not reflect their general use meaning.
- Jargon, even terms such as "debentures" or "net tangible assets" may not be clear to consumers and may be misleading.
- Independence or impartiality should not be advertised where the person may receive commissions or referrals. Some of these terms are wholly restricted by section 923A of the Corporations Act.
- Unauthorised use of terms such as "sharebroker" or "life insurance broker" is also prohibited. See section 923B of the Corporations Act.
- Take care when using celebrity endorsements, as celebrities should have an understanding of the product prior to supporting it.
7. Target audience
- The target audience should be fully considered prior to advertising, as noted in the media-specific points below.
- In particular, complex products may have a limited audience, whereas larger audiences may be able to understand or not be misled when considering simpler products.
8. Consistency with disclosure documents
- Statements made in advertisements should be consistent with the PDS, prospectus or other disclosure document.
- However, an advertisement should not simply rely on context or information from a disclosure document where that information is not included in the advertisement. For instance, making reference to "page 8 of the PDS" may not be appropriate.
- It is compulsory to notify consumers that they should nonetheless read the product disclosure document before making a decision about acquiring the product. An indication must be given of where to find that PDS, prospectus or other disclosure document.
9. Photographs, diagrams, images and examples
- Images should not outweigh the message in an advertisement. For instance, an advertisement for a high-risk investment may be misleading if it features a large image of a person playing in a mountain of gold bullion.
- Tables, diagrams and charts may be included but should fairly represent the information conveyed without skewing that information or presenting an unbalanced image.
- Where case studies or examples are used, they should have an explanation of their purpose and assumptions on which they are based. Examples of benefit scenarios should also be accompanied by examples of detriment scenarios.
10. Nature and scope of advice
- Where advertising advice services, the scope and nature of that service should be portrayed accurately.
- Advice advertising should not "overreach" to topics or types of advice that go beyond "realistic expectations" about what the service can achieve.
Media-specific guidance for advertising financial products and services
RG 234 also provides a set of media-specific guidance topics for the following types of media. The advertisement must nonetheless comply with the above requirements, but when using the following media, these additional guides will also apply:
- mass media — consider the general audience
- audio advertising — warnings, disclaimers and qualifications must be read at a comprehensible speed for an average listener
- film and video advertising — warnings, disclaimers and qualifications should be easily understandable to an average viewer at first sight
- internet advertising — consider the "overall impression" created by internet banners, ensure there is enough space for all relevant information and ensure there is a way for consumers to keep a record of the advertisement (particularly important for randomised pop-up advertisements)
- outdoor advertising — consider the conditions under which the advertisement would be viewed, such as from a motor vehicle or high on a building
However, each of these is a fairly commonsense piece of guidance.
ASIC's blunt warning - penalties may be high
The clear message from RG 234, as well as from the FOFA reforms, is that marketing financial products and services is a delicate process. The public image of products and financial service providers should reflect a true and accurate picture of their attributes.
At the very least, where financial product or service providers comply with ASIC's "good practice guidance", it is more likely that they will avoid watchdog scrutiny. This is extremely desirable given ASIC's blunt warning, cited directly from RG 234, that "penalties can be high".
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.