What finance ads don't tell you
Helen Monks tells you how to make sure you're not misled by advertising jargon
Saturday 29 April 2006
Financial services companies have long had an unhealthy obsession with jargon - not least when it comes to advertising their products. At worst, financial adverts are confusing for consumers or even misleading - often sending them on a journey to financial woe. According to research by the accountant Grant Thornton, around three-quarters of UK financial services advertisements and promotions fail to meet the standards set by the Financial Services Authority (FSA).
Its review of 117 financial promotions - many issued by some of the UK's leading household names - uncovered a disturbing range of less than ethical tactics. These included companies advertising headline-grabbing deals or cheaper premiums which were not actually available, using scare tactics, failing to include mandatory risk warnings and making unproven claims about a product.
FSA rules demand financial ads are clear, fair, not misleading and provide a balanced picture of the product or service.
An FSA spokesperson says: "A consumer's initial impression of a product can inform their subsequent decision-making to a great degree, so it is important firms produce promotions that help consumers make the right choice."
Below, we demistify the murky world of financial adverts, explaining 10 of the most common bits of jargon, and sales tricks.
Banks and building societies are all too quick to boast about the headline rates on savings producst, but these are often only on offer for a limited period, after which the rate plummets. The AER (Annual Equivalent Rate) may sound like a nasty bit of jargon, but in fact it should help you to iron out the effect of any offer periods, giving you the opportunity to compare accounts on the same basis.
If you're looking for an account to save in for the longer run, it's best to avoid those with introductory higher rates.
Andrew Hagger of Moneyfacts.co.uk, the financial comparisons website, points out that some of the most competitive rates on savings and other products are sometimes only available long enough to secure a top table position before running out days later.
The APR (Annual Percentage Rate) is a standardised way of calculating interest, and like the AER should help to make comparisons easier on personal loans. But be careful when you're looking at mortgages. Moneysupermarket.com, the financial comparison website, advises borrowers to look at all costs and special offers over the term, such as arrangement fees, exit fees, valuation fees and cashback, as well as the initial pay rate.
Those with the best APRs are not always the best value.
While Office of Fair Trading rules demand that "typical rates" for credit cards and loans are granted to at least 66 per cent of customers, this is not policed. "While there's no suggestion the banks aren't playing by the rules, the system remains open to abuse," says Hagger.
The typical rate is not guaranteed, and most lenders (bar notable exceptions such as Nationwide and Direct Line) operate "risk-based pricing". This means customers with clear credit records might get rock-bottom rate, but those with a few blemishes could be charged much higher interest.
Stuart Glendinning, director at Moneysupermarket.com, says: "Once a credit check has been performed, it leaves a footprint on your record, effectively reducing your chances of being offered the best rate elsewhere.
"Once people have been through the application process, many won't be bothered to go elsewhere, even if the rate they are ultimately offered is nowhere near the 'typical rate' which is advertised."
'0 PER CENT'
This sounds like a free ride to cheaper credit, but Hagger cautions: "With the introduction of sometimes uncapped fees to move balances to a 0 per cent offer, consumers need to be clear what they are getting into."
Also, almost all UK card-providers, with exceptions such as Nationwide, allocate monthly payments to outstanding balances at the lowest rate of interest - paying off your interest-free credit first, while letting interest build up on your most recent purchases and transfers.
'CHEAPER THAN THE COMPETITION'
Grant Thornton found in some cases (though the company is not prepared to name and shame) that advertised discounts on car insurance were simply not available when customers called to take advantage. In other cases, adverts for some general insurance products compared the cost of basic cover with top-flight products of their competitors, creating a skewed impression of a product's competitiveness.
GROSS OR NET?
Banks and building societies will often advertise the 'gross' interest rate on their savings products -which is how much you'll receive before tax. But if you're not putting your money into a tax-free account, such as an Isa, then it's the 'net' rate which reflects what you'll really get.
The FSA has acted on a number of misleading ads for capital protected or so-called guaranteed products. It warns that the way returns are linked to the performance of a particular stock market index can be quite complicated - in some cases depending on performance during different periods within the life of the product. Philippa Gee, investments director at broker Torquil Clark (www.tqonline. co.uk), says: "People read 'protected' or 'guaranteed' and think 'low risk'. When you drill down to what's really on offer, that's often not the case."
It's worth remembering that just because your investment is guaranteed, it doesn't mean you can't lose money. If you get back exactly what you put in, then your money will have lost its value due to the effect of inflation.
Gee is also concerned about funds tagged 'alpha'. This refers to the amount of added performance the fund manager gives by clever stock selection.
She says: "Many consumers are liable to interpret alpha funds as building in a promise to outperform, not as an objective to do so. Marketing of funds doesn't needs to be dumbed down, there just needs to be a greater consideration of what different words can mean to consumers, and whether that matches with what's on offer"
Grant Thornton found that some adverts for critical illness cover made use of frightening statistics, such as "one out of three people will get cancer in their lifetime". However, the same ads did not go onto explain that some forms of cancer are not covered.
The Association of British Insurers (www.abi. org.uk) recently issued a best practice guide for its members that sell critical illness insurance cover, recommending that product literature clearly spells out any exclusions.
However, it's still worth reading the small print before signing up, even if the headline of an advert suggests you'll get a payout for cancer cover. Similarly, most critical illness policies will only pay for heart attacks if they are of a certain severity, so be cynical over ads which seem to promise complete cover.
MVR OR MVA?
If you own a with-profits policy, you're likely to have to pay a MVA (Market Value Adjuster) if you ever want to cash it in. This is because with-profits policies are meant to smooth returns over a long period, so if you leave prematurely, you may be unfairly disadvantaged or unfairly benefiting at the gain or expense of other policyholders.
Recently, MVAs have become better known as Market Value Reductions (MVRs) after it became clear that any adjustments were always downwards. Some funds have now removed their MVRs, but it's well worth checking your position before moving to cash your policy in.
If you think you have seen a misleading or unclear financial advertisement call the FSA advertising hotline: 0845 730 0168 or go to www.fsa.gov.uk/consumer.
The Advertising Standards Authority (ASA) requires all advertising to be legal, decent, honest and truthful. Visit www.asa.org.uk or call 020 7492 2222.
The Office of Fair Trading (OFT) can take action against some misleading claims about credit, loans and debt. Go to www.oft.gov.uk, or call 08457 22 44 99.
The Trading Standards Department ( www.tradingstandards.gov.uk) enforces laws on misleading prices.
Comparisons websites: Moneysupermarket.com, Moneyfacts.com Fool.co.uk
SO WHAT MAKES FOR A BAD ADVERTISEMENT?
* In 2004, the Financial Services Authority (FSA) fined AXA Sun Life £500,000 for producing misleading advertisements promoting two products. An ad campaign, featuring June Whitfield and Carol Smilie, for the Bonus Cash Builder Plus Plan and the Guaranteed Over 50 Plan did not provide customers with sufficient information about how the product worked or the risks involved. The benefits of the products, including free promotional gifts, were hyped, with less prominence given to key information about risks. Comparative data in some advertisements was also found to be inaccurate.
* Last year, the FSA fined the share-tipping company Hemscott Investment Analysis £50,000 for misleading financial promotions. The regulator found a promotion using the slogan "We even make a bear market all soft and cuddly" had bypassed Hemscott's approval procedures and selectively quoted past recommendations by the company. The ads used the best-performing recommendations, rather than a cross-section. There was failure to mention that past performance of the company's virtual share portfolio would not necessarily be repeated.
* Barclays Bank was recently forced to withdraw one of its television adverts after the Advertising Standards Authority received a wave of complaints from viewers who were offended.
The ad showed a man drinking a can of soft drink in a park before realising it has a bee inside. After being stung, his face swells up, leading him to jump in a nearby lake to cool himself off. Emerging from the water, covered in pond weed, he causes pandamonium in the park, before a warden turns up and shoots him with a tranquiliser dart. He is then arrested.
Barclays said the ad aimed to send out the message that people are more likely to get arrested than change their bank account.
However, the ASA ruled that it was offensive to people who suffer from allergies to bee stings.
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