Discuss the regulations that directly influenced on advertising specific financial services
Posted by Ripon Abu Hasnat on Monday, June 9, 2014 | 0 comments
Some of the
regulations that have a direct influence on advertising specific financial
services are discussed below-.
Advertising Commercial Banking Services:
Advertising
of commercial banking services is monitored through the various regulations
enforced by the Federal Reserve as well as the Office of the Comptroller of the
Currency. For example, the Truth in Savings Act
specifies items of information that depository institutions should disclose
about deposit accounts featured in their advertisements. Terms such as the rate
of interest, applicable fees, and terms of the deposit such as the minimum
length of time that is required prior to withdrawal of the funds need to be
clearly communicated to consumers. For credit products, the Truth
in Lending Act (regulation Z of the Federal Reserve)
dictates that the true cost of credit must be communicated in written form to
consumers. Regulation Z also establishes the method to be used to determine the
cost of credit and requires that lenders communicate this information in the
form of the annual percentage rate (APR).
Regulators
may also monitor advertisements to ensure that banks do not exaggerate the
extent to which they claim to make credit available to customers as a means for
generating leads. In addition, commercial banks, which are ensured by the
Federal Deposit Insurance Corporation (FDIC), need to mention their coverage
status with the FDIC in their ads and other consumer communications.
Advertising of Insurance Company:
Each state’s
department of insurance regulates insurance advertising. The objectives of
insurance advertising regulations are twofold. The first objective is to
prevent the creation of biases in consumer assessment of the probability of
catastrophic events. This objective relates to the established fact that
consumers typically are unaware of the risks and probabilities for events for
which they purchase insurance products, as discussed in Chapter 2. For example,
insurance advertising that bolsters the fear of catastrophic events through
dramatic imagery is not allowed. Negative outcomes of disasters should also not
be overstated in insurance advertisements. The second objective of insurance
advertising regulations is to prevent the creation of inferences that suggest
that an insurance company is unusually generous in its payout behavior. As a
result, insurance advertisers have to take great care not to exaggerate either
the severity of harmful events or their own willingness to payout customer
claims. In addition, images of currency and checks should not be included in
advertisements for insurance products as they may make consumers infer
unconsciously that the insurance company has a high propensity to payout claims
and is usually generous.
An additional
objective in insurance advertising is to prevent misleading information from
being communicated to consumers. Formally, an ad can be considered misleading
when it causes individuals with average levels of intelligence to arrive at
inferences that conflict with reality. In order to establish if such inferences
are a result of the advertisement, formal market research utilizing third-party
companies and random samples of consumers would be used. Insurance advertising
is further restricted by the terminology that may be used. Terms such as
“liberal” and “generous,” for example, cannot be used as they boost impressions
of the payout behavior of the insurance company. Similarly, references to words
such as “financial disaster” and “catastrophic” are not allowed because they
may exaggerate the extent of the harm consumers might face if they do not have
insurance coverage. The fact that insurance prices vary from one consumer to
the next due to varying risk levels also limits the pricing terminology that
can be used in insurance advertising.
Therefore,
terms such as “low,” “budget,” and “low-cost” cannot be used.
Advertising, Investment and Brokerage Services:
The
advertising of investment and brokerage services is regulated by the SEC as
well as the NASD. These regulators require that advertisers ensure that
consumers understand that past returns of an investment may or may not be
realized in the future. As a result, statements to this effect need to be
mentioned in consumer communications, including advertisements in mass media
and direct mail. Advertisements for mutual funds must also encourage potential
investors to seek the detailed technical information on the fund by requesting
the fund’s prospectus. The ads should facilitate such action by providing
consumers the necessary contact information.
Additional
Securities and Exchange Commission rules should be consulted for the details of
information that must be included in mutual fund advertisements. Readers are
encouraged to further examine sources specializing in financial services
advertising regulations for additional details.
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