Your Money: Advertisers who feather their own nest

Buyer beware: some companies offering big returns on their products can be economical with the truth, writes Jean Eaglesham
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The Independent Online
THE REPUTATION of ostriches for sticking their heads in the sand when frightened is based on a fallacy - in fact, they throw themselves to the ground.

Nevertheless, that reputation could be seen as a symbol of the watchdogs' unwillingness to clamp down on the misleading potential of financial advertising.

For example, adverts running in the national press promise anyone who coughs up pounds 6,000 or more to buy an ostrich "up to 70% profit per annum" from the Pinstripe Farming Company Ltd or "51.6% minimum return annually" from the Ostrich Farming Corporation.

Both are beguiling claims. But investors should beware of taking such figures at face value. The Ostrich Farming Corporation's 51.6 per cent return figure is not quoted on the same basis as other investments, with the effect of making the returns look particularly favourable. Its "minimum annual return" is based on its promise to buy back a set number of chicks at pounds 500 a go for five years, giving a return of 258 per cent on your money, or cash profits of pounds 15,500 on an investment of pounds 6,000. The 51.6 per cent figure comes from dividing the 258 per cent by five.

But this is not directly comparable with the way returns are normally quoted on investments. For example, a Personal Equity Plan producing a 258 per cent total return over five years would have annual growth of less than 30 per cent. Casson Beckman, a firm of accountants that has advised the ostrich firm, says the average annual return from the birds, given the advantage that the cash is paid out during the five years, is in fact equivalent to 42 per cent a year.

Those figures may still seem impressive. But the promise to pay it is only as good as the ability of the Ostrich Farming Corporation to make those payments. If it fails to do so, or goes bust, you have no right to payment under the Investors Compensation Scheme or even to complain to the watchdogs.

This is because the adverts are for an investment in a physical asset (the bird) rather than in money (in some shape or form), and therefore fall outside the protection of all the appropriate legislation.

Ostrich ads could be seen as an isolated example of inadequate controls on advertising. The rules that do exist are, in the main, highly detailed. Certainly, the various regulators do not seem to think there are any real problems. The investment watchdogs have the power to discipline and fine companies for rule breaches, but have rarely exercised that power.

A spokesman for the Advertising Standards Authority, where financial ads accounted for just 2 per cent of the 9,657 complaints made in 1994, said he thought the underlying reason for the absence of complaints was simply that "a lot of people are profoundly ignorant about financial ads. So many people are intimidated by financial products and can easily be influenced by a given marketing approach".

This is supported by evidence of wider problems with controls on financial ads. These include:

q Headline figures not being obtainable by most people. Adverts for building society savings accounts are usually dominated by the figure for the before-tax interest rate, despite the fact that only around 5 per cent of taxpayers claim back the tax that is deducted from the interest paid on these accounts.

q Inconsistent rules on borrowing. Mortgages, personal loan and credit card adverts all have to quote an annual percentage rate (APR) which, at least in theory, shows the comparable annual cost of the borrowing, taking the interest and all other charges into account. However, advertisements for overdrafts do not have to do this.

Instead, they can quote an effective annual rate. This sounds similar, but is nothing of the sort. In fact, it is just a measure of the interest charged and excludes the (often very hefty) regular monthly or quarterly charges. Add in those charges and the APRs for many overdrafts would jump from double to triple figures.

q Costs that are required to be misleading. Mortgage deals out-rival each other at present for their sheer complexity. Apart from the host of fixed-rate and discount deals on offer, the various charges and "extra" fees make it almost impossible to compare like with like.

The watchdogs have, of course, a solution to this, the APR, which should give a benchmark to show which deals are relatively expensive or cheap. To this end the rules prescribe when and how prominently the APR must be quoted.

But the measure itself is seriously flawed.

Take just one example. Following a prosecution by a trading standards department, a court ruled that lenders' advertis-ements for fixed-rate mortgages must calculate the APR on the basis that the fixed rate continues throughout the life of the mortgage.

So, to take a typical example, the Newcastle building society has been exhorting readers of its advertisement: "Don't hope for a prosperous New Year - Make sure of one! 4.69% (5.00% APR) fixed rate mortgage". After two years, the rate reverts to the normal variable rate, currently 7.49 per cent. Switch within five years of taking out the mortgage and you must pay a penalty charge of four months' interest, a fact that even the small print in the ad fails to point out.

q Jean Eaglesham works for 'Investors Chronicle'.

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