Financial products and services advertising rules singled out for updating

As of 1 March 2022, the new, updated Financial Advertising Code (“Code”) - published by the Advertising Standards Authority Inc. (“ASA”) - came into effect.  From that date, new advertisements for financial products and services were covered by the Code, with all financial advertisements falling under it from 1 June 2022.  In the interim, existing financial advertisements predating 1 March 2022 will remain subject to the old Code for Financial Advertising.  Financial product issuers and financial service providers will need to pay close attention to the Code as it adds another layer of potential risk for any advertisements they may publish concerning their goods and services. 

There are already significant potential legal hazards faced in terms of the Financial Markets Conduct Act 2013 (“FMCA”) with respect to advertising financial products.  The Financial Markets Authority (“FMA”) published an updated Guidance on this topic in October 2021.  The Code has expressly been written to dovetail in with this Guidance and should be read in conjunction with it. 

Who is the ASA and why does it matter?

The November 2021 Report on the review of the Code for Financial Advertising and the draft Financial Advertising Code (“Report”) provides a brief backgrounder on how the ASA came about and what its role is.  The entity exists to self-regulate the publishing, broadcasting and advertising sectors in New Zealand.  It was set up in 1973 as the Committee of Advertising Practice by the Newspaper Publishers’ Association, the New Zealand Broadcasting Commission and the Accredited Advertising Agencies Association.  In 1990 the Committee became an incorporated society then newly named the ASA.  Currently, according to the ASA’s website, there are 14 members representing advertisers, agencies and the media.

According to the backgrounder, the ASA has a wide remit:

The ASA sets standards and supports compliance in all forms of media, including, but not limited to, television (including on-demand television), radio, print, out-of-home (for example, billboards, bus shelters and buses), cinema, digital, email, websites, social media (including user-generated content [UGC]), influencers, video, apps, advergaming, addressed and unaddressed mail, brochures and point-of-sale material. (Report, p. 6)

The backgrounder goes on to define the ASA’s mission in ethical terms:

Self-regulation encourages the advertising industry to take responsibility to ensure legal, decent, honest and truthful advertising communications to consumers and respect for the principles of fair competition. (ibid.)

The ASA has three main objectives, according to the backgrounder:

1. To seek to maintain at all times and in all media a proper and generally acceptable standard of advertising and to ensure that advertising is not misleading or deceptive by statement or implication.
2. To establish and promote an effective system of voluntary self-regulation with respect to advertising standards.
3. To establish and fund an Advertising Standards Complaints Board (the Complaints Board) and an Advertising Standards Appeal Board (the Appeal Board), both of which have a public member chair and a public member majority. (ibid.)

The ASA develops multiple advertising codes that prescribe the self-regulatory principles for advertising in New Zealand.  These codes include the overarching Advertising Standards Code (“ASC”) and beneath that five specialised sector codes concerning advertising that carries particularly sensitive burdens in respect of social responsibility: Alcohol, Children and Young People, Finance, Therapeutic and Health, and Gambling.  Normally the codes are reviewed every five years, but they can be reviewed at any time.

Effectively, the ASA is the industry watchdog for advertising standards across a very broad jurisdiction. 

The ASA’s Report notes that complaints received about financial advertising are relatively infrequent.  Between 2016 to 2020, such complaints made up between 2% and 3.5% per annum of total complaints received, and of those particular complaints only a handful were upheld, more were not upheld, and most had no grounds to proceed (ibid., p 14).  Nonetheless, despite the low recorded frequencies of complaints about financial advertising and upholding of such complaints, the ASA clearly is of the view that this type of advertising requires continuing vigilance and its own dedicated Code for enforcement.

Reputational and financial risks from complaints upheld by the ASA

On its webpage concerning the codes, the ASA states that, “The function of the Codes is to complement, not to replace, the laws of the land.”  Accordingly, advertising that breaches any laws, such as the FMCA, will still be subject to due legal process and potential penalties.  As such, advertisers of financial products and services will need to stay strictly within the law if they do not wish their advertising to attract legal sanctions for violations. 

The ASA’s codes provide an additional overlay to the law that is in part “name and shame” but also has teeth in that errant advertisements can be pulled at cost to the advertiser.  The ASA’s penalties regime would be most likely felt in terms of reputational risk by a commercial entity such as a financial product issuer or a financial service provider.  Trust and trustworthiness are critically important within the financial industry, particularly the earned and deserved trust of existing and potential customers.  If the ASA should uphold a complaint concerning a financial advertisement, then there could arise significant harms to the advertiser’s reputation, customer relations, and public image that may be difficult if not impossible to reverse.  Resulting opportunity cost in loss of new and existing business would in itself amount to a financial penalty.  Costs incurred in producing and distributing the censured advertisement would be a write off.

On its complaints process webpage, the ASA sets out what the penalties can be as steps 4 and 5 of the process, with such adverse results including inevitable publicity:

Step 4

If a complaint is accepted, a copy of the complaint, the advertisement and the responses are sent to the Complaints Board. It will then determine whether the Codes have been breached and all parties will be informed of the outcome. A formal written decision is distributed to you, the parties and to the media.

Step 5

If a complaint is upheld, the advertiser, in accordance with self-regulatory principles, is required to immediately withdraw the advertisement. Additionally the media are similarly required not to publish or broadcast an advertisement which has been held by the Complaints Board to be in breach of the Codes.

It is safe to say that advertisers of financial products and services should be eager to avoid finding themselves on the receiving end of steps 4 and 5.

What does the new Financial Advertising Code have to say?

The new Code sets out a definition of financial advertising:

Financial Advertising means any message, the content of which is controlled directly or indirectly by the Advertiser, expressed in any language and communicated in any medium with the intent to influence the choice, opinion or behaviour of those to whom it is addressed and is for the purpose of promoting a Financial Product or Service.

(Code, p. 4)

The Code is animated by two key principles, namely social responsibility and truthful presentation:

1. Financial Advertising must be prepared and placed with a high standard of social responsibility to consumers and society.
2. Financial Advertising must be truthful, balanced and must not be misleading.

In respect of social responsibility, under Rule 1(a) the Code adds to the ASC three specific requirements.  These are, in summary, that (i) the content of financial advertising must be easily understandable to consumers, with proper disclosures provided, (ii) key information must be clearly legible or audible, and (iii) the sourcing of advertising content must be appropriately compliant (ibid., p. 5).  In respect of the third requirement, the rules distinguish between (i) persons (individuals and entities) who are not licensed financial advice providers, such as social media influencers and other online content creators, (ii) persons (individuals and entities) who are licensed by the FMA to provide financial advice, and (iii) persons (advertisers and their agents) who are responsible for user-generated comments, reviews, testimonials and endorsements.

In respect of truthful presentation, the Code adds to the ASC two additional Rules, 2(b) and 2(c), for financial advertising.  Rule 2(b) states:

1. Obvious untruths, exaggeration, puffery or deliberate hyperbole must not be used in relation to financial claims.
2. The content of Financial Advertising must not take advantage of consumers’ inexperience, lack of knowledge or financially vulnerable situation.

(Ibid., p. 7)

Rule 2(c) is specifically concerned with use of data in financial advertising and is worded in prescriptive detail.  Three areas are covered concerning (i) not using information in ways that are misleading or untruthful, (ii) not representing past performance as a reliable indicator of future performance, and (iii) using technical language and statistics only in ways that are relevant in context and easily understandable by non-expert consumers, with sources provided for any research results included.

With respect to advertising past investment performance to entice or retain customers, the FMA has already given clear warning to the funds management industry of what its expectations are concerning promoting Covid-19 era market recovery returns, and so there should not be much by way of recurrence of this type of offending.

Financial advertisers who ignore the provisions in the Code, or the rules of the ASC more generally, will do so at their own peril.

Conclusion

“The ASA’s new Financial Advertising Code, along with the Advertising Standards Code and the FMA’s Guidance note Advertising offers of financial products under the FMC Act, must be considered as mandatory reading for all financial product issuers and financial service providers who undertake financial advertising within New Zealand,” said Matthew Band, General Manager of Corporate Trustee Services at Trustees Executors.

“Ignorance is no excuse when it comes to scrupulously following all the rules and regulations for financial advertising.”

“Senior management and boards of directors of financial advertisers should be made aware, if they have not been already, that the ASA has issued a new Code on financial advertising that applies in a phased manner and already governs new financial advertisements from 1 March 2022.”

“It should be noted that the ASA has crafted this Code with an eye to how it fits in with the FMA’s recent Guidance on advertising financial product offers, and so a violation of the Code could also separately be a breach of the FMCA, particularly with respect to section 13, Part 2 Fair dealing, and Part 3 Disclosure.”

“All financial advertising should be carefully vetted pre-publication to ensure that there are no contraventions of either the FMCA and other relevant laws or the current applicable codes of the ASA.”

“There should be fit-for-purpose compliance review and sign off for all proposed financial advertising, which process should in turn be subject to regular compliance assurance programme testing.”

“Financial advertisers should ensure that any complaints lodged or official investigations undertaken with respect to their advertising are captured by clear, documented policies and procedures for timely registering, reporting, addressing, remediating and escalating both internally and externally.”

“Such policies should include swiftly informing senior management and the board of directors of adverse financial advertising incidents so that there is full visibility of such matters at the governance level.”

“As a licensed Supervisor, we expect from our supervised clients nothing less than full and willing compliance with respect to all rules and regulations pertaining to financial advertising, including applicable ASA advertising codes and the FMA’s Guidance on advertising offers of financial products.”

“We further expect that we will be promptly notified by our supervised clients of any complaints, breaches or investigations concerning their financial advertising.”

“All of us share with wider society direct and abiding interest in the ASA’s imperative that financial advertising must always be socially responsible and truthful, balanced and not misleading.”

For comment or more information, or to be added to the free email subscriber list of “The Supervisor”, please contact Matt at [email protected].