4.3.1 Misleading statement regulations and whistle-blowing
Two aspects of regulation that are aimed at ensuring that consumers are not put at risk in the financial market place relate to the rules preventing misleading statements being placed in product promotions and to ‘whistle-blowing’, which can flush out improper practices within financial firms.
A further form of protection for customers comes in the legal sanctions that apply to firms producing misleading statements about their products and services.
Under Section 397 of the Financial Services and Markets Act 2000, it is a criminal offence to encourage customers to purchase investment products by the use of false or misleading statements. In fact, the law here extends to more than just statements which have been made that are untrue or deceptive. It also applies to the deliberate concealment of relevant facts that, if made public, would deter customers from acquiring the product. It also applies to forecasts or promises about the potential returns from the product which are manifestly unrealistic. The provisions of the legislation also apply to activities which falsify the market price of a product, with the intent of encouraging a customer to either buy or sell a product.
The deliberate misrepresentation of the facts about a product, the market it trades in and its prevailing market price is clearly a form of market abuse because retail customers, in particular, rely on the professional practices of firms to make considered and accurate judgements about their financial services dealings. Despite the existence of the legal protection, the risk of such misleading statements should encourage customers to get ‘clued up’ on the products they are thinking of investing in – rather than relying on the apparent expertise of those selling the product. At the very least, getting third-party advice about products that you have limited knowledge of, and familiarity with, makes good sense.
Operating in a climate where those with concerns about aspects of their firm’s activities can speak out and report matters without suffering adverse consequences is an important facet of a strong regulatory environment. It provides an additional safeguard to customers because employees of financial services firms may spot a misdemeanour in their firm’s conduct that would otherwise go undetected.
Under the Public Interest Disclosure Act 1988, protection from retaliation by their employers is afforded to those who report matters of concern about their firm’s conduct – an activity commonly known as ‘whistle-blowing’. This Act provides the framework for employees to make protected disclosures (i.e. ‘blow the whistle’) where they believe a legal offence or miscarriage of justice has been committed, or where they believe that there is a deliberate attempt to conceal such acts.
The additional support that this provides for the regulation of financial services is shown by the way the regulators provide guidelines to the industry on how firms can apply procedures within their risk management frameworks to allow for whistle-blowing to take place.