The Financial Services Authority says sub-prime mortgage brokerages who distribute poor advertising and promotional materials are also failing to have adequate systems and controls in place to manage their businesses.
Over the past year, the FSA has been working with mortgage firms to improve the standards of their advertising and other promotional materials.
It has reviewed several hundred advertisements and promotional materials including flyers and classified advertisements in directories and regional newspapers.
The financial watchdog has also told more than 200 mortgage brokers to withdraw or amend misleading advertising.
On October 2 2006 Mortgage Strategy highlighted the extent to which sub-prime promotions were failing both basic compliance tests and to treat customers fairly.
As part of its proactive strategy, the FSA visited the worst offenders in October and November 2006 and found that where poor promotional materials had been issued, there were usually wider problems at the mortgage brokers.
A number of these firms have now been referred to the FSA’s Enforcement Division for further investigation.
Vernon Everitt, retail themes director at the FSA, says: “Financial advertising has a massive influence on the decisions people make.
“So it must be clear, fair and not misleading, leaving people with a balanced picture of the key pros and cons.
“This is particularly the case in advertisements by mortgage brokers in the sub-prime market, where people are making one of the most important financial decisions of their lives. We need to see standards here rising – and fast.”
In the firms visited, examples of misleading information included fee disclosure where the range of fees advertised was very different from what consumers ended up paying.
In these firms, customers were also being sold mortgages with sub-prime rates where there was no evidence they had impaired credit.
Everitt adds: “We have found that poor advertising is a sign of wider problems in the way mortgage brokers are managed and controlled.
“We will continue to intervene where this might be the case, including taking further formal disciplinary action.
“Firms in this sector should be on notice that this is a priority area for us in assessing whether they are genuinely treating their customers fairly.”
Over the last two years the FSA has taken enforcement action in12 casesrelating to financial promotions, resulting in over1.5m in fines.
Over 930 cases across all sectors have been pursued directly with firms, where there were suggestions that promotions fell below the required standards.
Although action was not necessary in every case, in around 60% firms quickly amended or withdrew the advertisements without the need for formal disciplinary action.
The work on promotional materials runs alongside another FSA project looking at whether customers are treated fairly throughout the sub-prime mortgage advice and sales process. These findings will be published in summer 2007.