Misleading Ads of Loan Products

A donkey work of compliance officers in a retail business is to review the huge amount of marketing materials. While generally more attention is paid to ads of investment products, it doesn't follow that ads of loan products trigger no regulatory concern.

In Australia, ASIC recently raised concerns over their misleading promotional material issued by two home loan lenders, namely One Direct and MyRate.

Between Jul and Sep 2006, One Direct and MyRate advertised a low, variable home loan rate that did not reflect the most recent Reserve Bank interest rate increase announced in August 2006. In fact both lenders had deferred the decision about whether to pass on the interest rate rise, either in whole or in part, until 2007.

ASIC was concerned that:

• the promotional material did not make it clear that the variable rate might be increased at some later stage to reflect the August 2006 interest rate rise;
• customers would not expect a variable rate to be affected by official interest rate increases announced some time before taking out their home loan; and
• the advertised rate was used as the basis for a comparison with another ‘standard’ variable rate, showing long-term savings inconsistent with the potentially temporary nature of the advertised rate.

After ASIC's query, One Direct and MyRate have amended their advertising to better inform potential customers about the nature of their current variable rate. If customers affected by a rate rise inconsistent with the original advertising decide to refinance their loan, they will not be charged a deferred establishment fee by either lender.

Consumer protection in respect of loan product promotion is obviously better in Australia. In Hong Kong, cold callers promoting a personal loan plan would only tell me how low the monthly flat rate (say, 0.7% p.m. for 3 years) is. Without my further enquiry, they would never reveal that the annualized interest rate is up to 15%!