On 14 October 2019, ASIC and the Netherlands Authority for the Financial Markets (“AFM”) released a joint report critical of current disclosure regimes in respect of the full range of financial products across multiple jurisdictions.
Entitled “Disclosure: Why it shouldn’t be the default”, the report acknowledges that whilst adequate disclosure of financial products (including securities) is a necessity, considered in isolation, disclosure is overwhelmingly inadequate in achieving the aim of effectively protecting consumers from harm. Whilst the report identifies several key limitations of disclosure, it has left the door open as to what (if any) regulatory changes are required in the Australian context.
Limitations of disclosure
The report considered 33 case studies across Australia, the Netherlands, the UK and the US, in making the following observations:
- Complexity: disclosure does not solve the complexity of financial services and markets, and merely simplifying disclosure documents does not necessarily address or reduce that underlying complexity, which consumers may struggle to deal with when the potential for emotion, uncertainty and risk are factored into the equation.
- Providers: disclosure must compete for consumer attention and financial product providers can (and do) work around or undermine disclosure requirements by strategically timing when disclosure is provided or by exploiting existing regulatory loopholes.
- Standardisation: ‘one size fits all’ approaches to disclosure may not be effective, as the effectiveness of disclosure is broadly dependent on the individual consumer and the context.
- Unintended consequences: Disclosure can backfire and may create unintended detrimental outcomes for consumers, potentially permitting conduct that is not in their best interests and contributing to harm.
- Warnings: warnings as to risks and features of certain products are not necessarily effective in assisting consumers to understand or avoid those risks and features. Warnings should also not be considered a “cure-all” for all problems in financial services and markets.
Where to now?
Given that the report is a broad discussion piece that identifies limitations and raises opportunities and challenges in relation to disclosure regimes for policy makers and regulators, it begs the question: what regulatory changes can we now expect in the Australian context?
ASIC has already indicated that it will make greater use of its expanded product intervention powers, and will set expectations for providers of financial products to deliver positive consumer outcomes under incoming design and distribution obligations (from 6 April 2021). Financial product issuers, advisers and consumers alike should keep an eye on this space – especially as the report highlights the need for “alternative regulatory tools” to mandatory disclosure, in order to afford consumers additional protection.