Recently ASIC and the Dutch Authority for the Financial Markets (AFM) released a joint report examining the effectiveness of disclosure in driving good consumer outcomes in financial services and products. In releasing the report, ASIC says that it is time to ‘”call time” on disclosure as the default consumer protection’.
- According to the report:
- disclosure does not solve the inherent complexity of financial services and financial products;
- disclosure needs to compete with other strategies used by firms for consumer attention;
- disclosure is a ‘one size fits all’ solution that will not suit the needs of all consumers in all contexts; and
- disclosure can ‘backfire’ in unexpected and detrimental ways.
- ASIC and the AFM also consider that warnings can ‘backfire’ and ‘might even be counterproductive’.
- ASIC and the AFM state that industry must not ‘hide behind technical compliance’ and should proactively match their product design, distribution, and communications to consumer needs and expectations.
- We consider that this report raises fundamental questions about regulatory policy and the future of financial services regulation.
Overview of the regulators’ report
The joint report is known as Report 632 Disclosure: Why it shouldn’t be the default (REP 632).
Financial product manufacturers and financial services providers are required by law to make disclosures to consumers in various forms including prospectuses, Product Disclosure Statements, key facts sheets, dashboards and warnings.
REP 632 states it explores the limits of disclosure, using case studies from ASIC, the AFM and other relevant sources as evidence. The regulators state in their report that the case studies ‘show how overloaded the expectations on disclosure and consumers can be; and why firms providing mandatory information does not necessarily result in “informed consumers” and often does not correlate with good consumer outcomes’. Simply put, the report states that ‘[d]isclosure is necessary, but not sufficient’.
The general themes of the report are fourfold, as follows.
1. Disclosure does not solve the inherent complexity of financial services and financial products
The report states that disclosure fails to resolve problems caused by the inherent complexity of financial services and financial products. REP 632 found that it was extremely difficult for consumers to identify ‘bad deals’ once they needed to take more than two or three features into consideration, leading consumers to over rely on price to the exclusion of other factors. When selecting a credit card, for example, the report states consumers are confronted with a range of different features including reward programs, interest rates, add-on insurances, security features, overdraft limits, and fees.
2. Disclosure needs to compete with other strategies used by firms for consumer attention
The report also found that firms use a variety of strategies to ‘attract, distract and influence’ consumers in the purchase process. In addition to the fact that many consumers choose to ignore disclosure documents because they seem too complex or too generic, the regulators considered that firms employ various strategies to ‘nudge’ consumers towards making decisions that are not in their best interests and diminish the impact of mandatory disclosure. This can be through creating social rapport with sales people and ‘overwhelming’ the consumer with a large number of decisions.
3. Disclosure is a ‘one size fits all’ solution that will not suit the needs of all consumers in all contexts
The regulators take the view that disclosure is necessarily ‘one size fits all’ solution. The report found that consumers vary in how they make decisions, what information they seek, and how they engage with it. Context also plays a significant role in shaping a consumer’s decision-making pathway. The regulators note that purchasing decisions are frequently made in less-than-perfect conditions and consumers will be short on time, resources, and influenced by emotion and intuition.
4. Disclosure can ‘backfire’ in unexpected and detrimental ways
REP 632 warns that disclosure can ‘backfire’ in unexpected ways. For example, when salespeople disclose their conflicts, some consumers are more likely to trust them because they perceive the salesperson as more honest.
A ‘warning about warnings’
The regulators also provide a ‘warning about warnings’. The report also found that consumers often do not understand warnings or, if they do, some will ignore the warning because they feel that they have no choice but to buy the product (eg struggling consumers who take out high-interest short-term loans). In this case the source of consumer detriment is not information asymmetry.
We think it is helpful for regulators to use conduct and apply behavioural research to consumer practices in the financial services industry. It is worthwhile, however, to stop and think about the trajectory of financial services regulation, particularly in relation to the purpose of disclosure.
Since the introduction of prospectuses decades ago, the accepted policy rationale has been that disclosures enable consumers to make better purchasing decisions. This report debunks that view.
As an industry, we learned that the goal posts were shifting with the introduction of ‘shorter’ Product Disclosure Statements a little less than a decade ago, with the policy rationale being that consumers cannot digest long disclosure documents and can only tolerate eight pages. REP 632 suggests that even eight-page disclosures have failed. Drafting disclosure documents in a ‘clear, concise and effective’ way is, according to these regulators, also not achieving consumer outcomes.
In recent years, ASIC has made efforts to streamline and modify disclosure obligations with a view to make it easier for consumers to engage with disclosure documents. For example, Regulatory Guide 221 Facilitating online financial services disclosure sought to raise consumer engagement with disclosure documents by encouraging providers to use digital disclosures. However, the joint report found that consumers are more likely to ‘skim read and rush’ their thinking when reading information on screens. Therefore, digital disclosure is apparently not a panacea to the ails of disclosure generally.
REP 632 suggests that ASIC has adopted a policy position in relation to disclosure such that it will require financial services providers or financial product providers to do more than simply comply with the letter of the law when discharging its disclosure obligations.
In releasing REP 632, ASIC states that, going forward, ASIC is taking a more consumer outcome-focused approach, making the most of our enhanced regulatory tool kit, including using its new product intervention powers when warranted and setting expectations for firms to deliver good consumer outcomes under their design and distribution obligations.
Further, in its media release ASIC states that this report demonstrates a ‘need to rebalance the onus from consumers to firms’. This signals a shift from consumers needing take control of and responsibility for their own decision-making (such as by actually reading disclosure documents that have been given to them before making financial and investment decisions) to the onus being on providers of products and services needing to ensure that consumers have the right outcomes. Is this policy shift in the best interests of either consumers or providers? Aren’t providers conflicted if they need to consider their own interests as well as those of their customers? One thing is for sure, and that is that those who prepare disclosure documents of any sort should feel a little less valued given that behavioural sciences might just suggest that their efforts are all in vain.