Online Financial Promotions

According to recent reviews carried out by the FSA, a quarter of all financial advertising on websites reviewed failed to meet the FSA's financial promotions standards and many firms' sponsored links were found to mislead consumers.

This edition of Corporate Clips looks at the pitfalls of making financial promotions on the internet generally as well as providing a reference guide to the financial promotion regime.

Scope of Website Communications

The financial promotion regime is intended to cover communications in any form, so communications published on websites are subject to the same regulations and exemptions as communications made in any other format. However, this "media-neutral" position can cause difficulties in reality. Hard copy documents have a traceable source location and geographically certain points of delivery, and it is relatively straightforward to restrict access to people in certain jurisdictions by not posting material to them.

The internet, on the other hand, is accessible and receivable worldwide and the physical point at which information was disseminated is unclear ? is it the location of the person uploading the information? the location of the server on which such information is uploaded? the location of the server used by the recipient? the physical location of the person viewing the information? or any of these?

Potentially, then, communications made via websites may be subject to the regulations of numerous jurisdictions. Helpfully, the US Securities and Exchange Commission has issued guidelines which state that US regulations will not apply if there is a prominent disclaimer on the website setting out that the investment is not open to US persons and that procedures are in place to prevent sale to such people ? such as obtaining evidence of non-US residence (a similar policy statement has also been issued by the Australian Securities and Investments Commission).

FSA Website Review

The form of many online communications has also been criticised. In the FSA's recent review, 25% of websites considered were chastised for providing inaccurate information, not clearly presenting risk warnings and burying key information ? such as fees or exclusions ? within the website or in separate FAQ sections.

Examples of good practice given by the FSA include:

presenting information in an accurate, clear and balanced way;

enabling the customer to access easily key information (for example, presenting both the benefits and drawbacks of a product in close proximity to each other); and

placing risk information prominently on the first page of the website and fixing the information so that it remains on the screen even if the user scrolls up or down.

The FSA will be carrying out a further review this month and promises to take "direct action" with any firms who continually fail to meet the required standards.

Sponsored Links

Sponsored links ? text-based advertisements returned by search engine ? may also be financial promotions and so must be clear, fair and not misleading. The difficulty here is to be able to comply with FSA rules yet still attract customers when working with an extremely limited number of characters. Google's AdWords service allows a headline and two lines of text yet imposes a maximum of just 95 characters.

The FSA specifically criticised advertisements which promise products at a certain price or special discounts or savings which may not be available to all recipients.

Hypertext Links and Banner Advertisements

Hypertext links may fall within the financial promotion regime if the link itself (rather than the site it links to) is a financial promotion or if the page containing the links is an inducement to click the relevant link with a view to the user engaging in investment activity.

A true links page may, however, be able to take advantage of the "mere conduit" exemption (see reference guide below for further information about useful exemptions).

Banner advertisements are clearer cut, as they are likely to be considered to be inducements per se. Like any other advertisements, whether they fall foul of the financial promotion prohibition will depend on whether their contents are an inducement to engage in investment activity.

Further Developments

As part of a wider review of the regulations that govern how authorised persons conduct investment business, the FSA has recently produced a new set of business standards that implement the Markets in Financial Instruments Directive (MiFID) and clarify the requirement for all communications to be fair, clear and not misleading.

HM Treasury has committed to reviewing the financial promotion regime (along with the exemptions) in Summer 2008, with a view to conducting a three-month public consultation starting in Spring 2009.

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Financial Promotion: A Reference Guide to the Prohibition and Useful Exemptions

The General Prohibition

No person must, in the course of business, communicate an invitation to engage in...