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Full Decision

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    Full Decision Full Decision Document Transcript

    • 08/359 DECISION Meeting 12 August 2008 Complaint 08/359 Complainant: S. Hood Advertisement: MARAC Finance Limited Complaint: The website advertisement displayed a banner type heading which contained the message: “The only rate you should be looking for.” Beside this message was an image affirming that Marac Finance Limited had an “INVESTMENT GRADE RATING” of BBB- from “STANDARD & POORS”. Complainant, S. Hood, said: “I wish to lodge a complaint regarding Marac Finance's website advertisement. On the main page it makes the following two statements: 1. "The only rate you should be looking for” and 2. "INVESTMENT GRADE RATING", with regards its BBB- credit rating. I find these two statements regarding Marac Finance as serious misleading, and untruthful in nature. Given the turbulent time in the finance industry, such advertising statements must be held to a very high standard. With regards to "The only rate you should be looking for" this implies that the BBB- Standards & poor credit rating is the only rate you should be looking for. This clearly implies that the BBB- rating is a secure investment. However, BBB- is the very bottom rating (the top is AAA) out of 10 Investment Grade Ratings. In fact this rating is so marginal, that if Standard & Poor's in the future downgrade it's rating for this firm by just 1 grade (to BB+), it then joins the ranks of the Speculative Grade Ratings, which are obviously far less secure, and joining such a class in the future could risk it having a run on its deposits by its investors, threatening the viability of this company.
    • 2 08/359 With regards to the claim that it is Investment Grade Rating, it should point out that the current rating is so marginal that the next rating down is effectively non investment grade. If Marac want to accurately describe their Investment Grade Rating, then they should use the term "Marginal” or similar, rather than describe it as Investment Grade.” The Chairman ruled that the following provisions were relevant: Code for Financial Advertising Basic Principle 2: Financial advertisements should observe a high standard of social responsibility particularly as consumers often rely on such services for their financial security. Basic Principle 3: Financial advertisements should strictly observe the basic tenets of truth clarity and should not by implication, omission, ambiguity, small print, exaggerated claim or hyperbole mislead, deceive or confuse, or be likely to mislead, deceive or confuse consumers, abuse their trust, exploit their lack of knowledge or, without justifiable reason, play on fear. Legal Counsel for the Advertiser, MARAC Finance Limited, said: “ 1. We act for MARAC Finance Limited and have been instructed to respond to your letter of 15 July 2008 and the complaint of S. Hood of 30 June 2008 on its behalf. 2. Our client was surprised to receive this complaint and is of the view that it is able to be disposed of on its face. MARAC takes its obligation as a responsible and leading participant in the financial products market seriously and has accordingly retained us to deal with this matter. 3. We note that under the procedures of the Authority "The Chairperson will determine whether the complaint is suitable for the Board's consideration ...". We would have thought that in cases like the present one the Chairperson would have been able to exercise discretion and not put an advertiser to the trouble and expense of requiring a formal response. 4. The complainant seems to complain that MARAC in highlighting its BBB- credit rating and stating that it was "the only rate you should be looking for" was misleading in terms of principle 3 of the Code for Financial advertising. This is entirely wrongheaded. 5. MARAC is one of the few finance companies which has taken the step of obtaining an independent credit rating. This shows a commitment to transparency and providing clear and independent information to the market. It is therefore quite accurate to say that the credit rating is "the only rate you should be looking for". That statement is making the very valid point that interest rates are largely irrelevant if the consumer has no information as to the
    • 3 08/359 creditworthiness of the deposit taking institution. 6. The complainant appears also to complain that the advertisement reproduces the Standard and Poor's description of a BBB- credit rating as Investment Grade. This aspect of the complaint is also ill founded. The statement, far from being misleading in any way is providing accurate and independent information to consumers of financial products. Investment Grade is the opinion of Standard and Poor's and as such a valuable informational point that ought to be provided to depositors. 7. The complainant seems to consider the fact that BBB- is at the lower end of the investment grade scale to be relevant. It is not. If MARAC were to lose its BBB- rating and it ceased to have an investment grade rating it would obviously cease using this in any advertising material. The complainant seems to miss the point that ratings are put into grade classes for a reason - namely that in the view of the rating agency the deposit taking entity is of that grade. It is illogical to suggest that MARAC should cease informing its potential depositors of the grade of its BBB- rating. 8. The complainant suggests that MARAC should add to the rating the word "marginal' or words to similar effect. MARAC does not propose to add words reflecting the opinion of the complainant or any other third party to the rating given by an internationally recognised rating agency. The opinion of Standard and Poor's is highly respected, thoroughly researched, and quite able to stand without addition or amendment. 9. The complaint is further difficult to comprehend given the fact that the advertisement was found on our client's internet site which also contained comprehensive information on the rating framework and links to further information about Standard and Poor's ratings (which we enclose for your information). That information is available by clicking on the advertisement. Indeed the information available with the advertisement even included a diagram showing the Standard and Poor's rating schedule and where on that schedule a BBB- rating lies. That makes it clear that the next lowest rating (BB+) is a speculative grade rating. Standard and Poor's BBB- includes an outlook statement of Stable and therefore likely downgrades are not foreseen by Standard and Poor's at the time of rating. 10. We have made clear our view that this complaint is frivolous and utterly without foundation. We are disappointed that the Authority does not appear to have a preliminary procedure in place by which complaints which are on their face not sustainable can be either rejected, or considered and disposed of without putting responsible market participants to the trouble and expense of dealing with vexatious complaints.” Deliberation The Complaints Board read thoroughly the relevant correspondence and reviewed the advertisement. It note Complainant, S. Hood, was of the view that the two statements, "The only rate you should be looking for” and "INVESTMENT GRADE
    • 4 08/359 RATING", which was referenced to a BBB- Standards & Poors credit rating, did not observe a high standards of social responsibility and were misleading to the consumer. The Acting Chairman directed the Complaints Board to consider the complaint with reference to the Code for Financial Advertising, Basic Principles 2 and 3. As such the task before the Complaints Board was to ascertain whether the advertisement observed a high standard of social responsibility required by Basic Principle 2, particularly as the product could affect a consumer’s financial security. Basic Principle 3 stated the need for financial advertisements to strictly observe the basic tenets of truth clarity and not by exaggerated claim or hyperbole mislead or deceive consumers. In making its determination the Complaints Board considered the product, audience and context relevant to the advertisement. The Complaints Board took into account the profile of the likely consumer, which would include the “mum and dad” investor. It referred to Complaints Board Decision 93/105 where the deliberation said, “… the Board was mindful of the test it had adopted in identifying the comprehension level of consumers which was the test in World Series Cricket Pty Ltd v Parish. Applying that test consumers included the “…knowledgeable, and those who are not, the superficial reader, viewer or listener, as well as the profound, the gullible as well as the cautious…”. It then considered the category of the investment vehicle offered, which by its nature was subject to market forces. It turned to the advertisement where the banner heading contained the absolute claim, “The only rate you should be looking for”. As the BBB- rate given by Standards & Poors was in fact at the base of the “Adequate” “Investment grade ratings” category, the majority of the Complaints Board was of the view that the claim in association with the reference to the BBB- Standard & Poors credit rating, contained a level of hyperbole and exaggeration and did not strictly observe the basic tenets of truth and clarity. The majority was of the view that it was likely to mislead and exploit the lack of knowledge of consumers, and thereby breached Basic Principle 3. The majority cautioned that the investment industry in particular, had a duty to be very careful with the use of language in their advertisements. The majority also said the advertisement before it did not observe the high standard of social responsibility required in advertisements for financial products, and ruled that it was in breach of Basic Principle 2. The minority of the Complaints Board disagreed, expressing the view that MARAC Finance was entitled to advertise their 31 March 2008 Standard & Poors Rating of BBB-along with the phrase “The only rate you should be looking for”. The minority noted the response of Counsel for the Advertiser where it stated “MARAC is one of the few finance companies which has taken the step of obtaining an independent credit rating.”. Accordingly, the minority said the heading was not likely to mislead the
    • 5 08/359 consumer and the advertisement was not in breach of Basic Principle 3. In the minority view the advertisement also met the requirements of Basic Principle 2. Turning to the issue of the inclusion in the advertisement of the symbol with the wording “Investment Grade Rating” Standard & Poors and BBB-, the majority of the Complaints Board said the Advertiser was entitled to include that reference as it was factual and thereby not misleading or in breach of Basic Principle 3. Furthermore, the majority took into account that the advertisement as a whole explained the nature of the rating, both the status of Standard & Poors, and the meaning of BBB-, and it was thereby of the view that the advertisement met the high standard of social responsibility required by Basic Principle 2. A minority of the Complaints Board disagreed and considered that the use of the BBB- credit rating did not meet the requirement for a high standard of social responsibility and could mislead the consumer with regard to the level of security provided in relation to the investment. However, in accordance with the majority view the complaint was not upheld in relation to the part of the advertisement where it said “Investment Grade Rating Standard & Poors and BBB”. In accordance with the majority view where it ruled that the claim “The only rate you should be looking for.” in the advertisement breached Basic Principles 2 and 3 of the Code for Financial Advertising, the Complaints Board ruled to uphold the complaint (in part). Decision: Complaint Upheld (in part)