The Inquiry seeks views on how to improve consumer outcomes. In particular it seeks views on the costs, benefits and trade-offs of a number of policy options or other alternatives.
Set out below are some comments on some of the consequences depending on the option recommended to, and followed by, the Government.
Improve the current disclosure requirements
One alternative is to improve the current disclosure requirements using mechanisms to enhance consumer understanding, including layered disclosure, risk profile disclosure and online comparators.
The financial services disclosure regime has changed over time with each new regime criticising the previous regime. For example, in 1997 the Wallis Report recommended a consistent regime for all financial products and a 1997 Corporate Law Economic Reform Program paper stated that it was “vital that investors be supplied with clear and comprehensible disclosure”. That led to diverse disclosure regimes being replaced with a single regime of retail product disclosure statements for everything except securities. Over time the uniform regime has been supplement with additional or different requirements for particular types of products such as hedge funds, superannuation products and margin lending products, while relief has been provided for other products, for example, basic deposit products. In relation to credit products, a range of additional disclosures have been included for specific types of credit contracts, together with the introduction of Credit Guides and key fact sheets for some products. Each time the regime changes, costs are incurred and often the costs are passed on to investors or borrowers.
“Improving” (ie changing) the regime once again would need clear benefits given the costs involved and the shortcomings of disclosure noted in the Interim Report.
Using technology and electronic delivery to provide information
This is one area for some quick wins. Removing impediments in legislation and industry codes should reduce the cost of providing upfront and ongoing disclosure material and other information in a form that consumers want. It should also facilitate the receipt of customer applications, consents and acceptance. Unlike the current fragmented arrangements, any conditions around this should be uniform rather than differing between products (for example, investments, insurance or credit) and between documents. If there are any specific documents where it is thought that electronic delivery or acceptance should not be allowed, then these should be clearly identified by exception.
Shifting responsibility for assessing the suitability of products from the consumer to the product issuer
Another option is to implement further measures that shift responsibility for assessing the suitability of products from the consumer to the product issuer. However, the Inquiry states that any substantial shift in the regulatory regime would require compelling evidence to support it.
Shifting the regulatory regime in this way would be a very significant change for the industry. We can draw on the consumer credit experience as a guideline.
In the credit context, much of industry already had procedures which reflected responsible lending requirements to at least some degree. However, their legislative mandate has resulted in some significant changes. Some types of loans have become virtually unavailable - more information is required on the individual customer’s objectives in relation to proposed credit [rather than making broad assumptions about customer requirements]. Notwithstanding the infrastructure which already existed in credit providers to perform credit assessments, in addition there has been a material increase in back office work and cost, for example in relation to verification of information provided by customers, and of record keeping.
These administrative burdens would be amplified in an investment context for issuers who currently collect much more limited information on investors, in particular those who are introduced through intermediaries.
If the FSI, and subsequently the Government, were to adopt this approach we would recommend that it do a stocktake of the other regulatory protections to see whether introducing a suitability test would obviate the need for some of the other current or proposed regulatory protections.
Other options raised include:
- Provide ASIC with additional powers such as product intervention powers and a temporary banning power
- Imposing product design or other restrictions
- Move towards more default products with simple features and fee structures.
In some ways this represents an evolution of the system rather than a radical new approach. However, giving the regulator a more comprehensive and proactive role in this type of intervention, rather than more ad-hoc intervention powers in specific areas which are generally perceived to cause concern, represents a shift in approach. How will the regulator balance issues around innovation, consumer choice and consumer protection in a fast changing environment? And how will its performance be measured against these, and other issues?