Facilitate innovative disclosure
Remove regulatory impediments to innovative product disclosure and communication with consumers, and improve the way risk and fees are communicated to consumers.
Government should amend the law to remove regulatory impediments to innovative communication of product disclosure information, such as the use of online communication tools, new media, self-assessment tools and videos. This change should occur in two phases:
- By ASIC giving individual exemptions from the law through its current pilot project to allow innovative communication of mandated product disclosure information.
- By implementing a broader exemption through legislation, taking into account the effectiveness of innovative disclosure under ASIC’s pilot project.
Industry should develop standards for disclosing risk and fees, and, if significant progress is not made within a short time frame, Government should consider a regulatory approach.
- Promote more engaging and effective communication with consumers to increase consumer understanding and facilitate better decision making.
- Reduce the number of consumers buying products that do not match their needs.
- Promote efficiency, including competition, by better informing consumers.
Problems the recommendation seeks to address
Mandated product disclosure requirements, which set form and content requirements, are impeding issuers from developing innovative approaches to communicating disclosure information.38 With technological developments, such as those enabling online financial services, consumer expectations have changed, but the current regime inhibits the ability of firms to meet these expectations.
The Inquiry supports the need for mandated product disclosure, which is necessary to inform the market and to support issuers and consumers in setting out the terms of their contract. However, the Inquiry sees scope to provide issuers with more flexibility to communicate mandated disclosure to better engage and inform consumers.
Consumers can more effectively use information that is accessible, engaging and understandable. Research shows that presenting financial product information in shorter disclosure documents that are better signposted, and using plain English and graphics, can improve consumer understanding.39 Although there has been limited research on the benefits of new media compared with paper-based disclosure, new media offers opportunities for more engaging communication.
An ASIC pilot project is underway to test innovative approaches to disclosure. Issuers in this pilot will provide consumers with a key facts sheet and a self-assessment tool using a variety of electronic media, including video, audio and interactive presentations. ASIC will provide individual relief necessary to facilitate the pilot.
Risk and fee disclosure
With the exception of the new standard risk measure in the MySuper product dashboard, the law generally does not provide detailed requirements on how to disclose risk. Yet evidence shows that consumers frequently misunderstand risk relating to financial products. ASIC found that 45 per cent of survey respondents, including industry participants, consumers and financial literacy specialists, believe consumers do not understand that higher reward often means higher risk, and 71 per cent believe that consumers fail to fully understand the risk involved in complex products.40 Behavioural economists highlight that individuals are prone to making systematic errors in decisions that involve assessing risk and uncertainty, such as when making insurance or investment decisions.41
The law mandates standardised communication of fees for superannuation and simple MISs. Despite these more prescriptive fee disclosure provisions, ASIC has recently reported varied compliance practices and is consulting on clarifications to the law. However, even after these clarifications of current law, aspects of fee disclosure would remain open to industry to standardise further where the law does not set specific requirements. These areas include:
- Improving treatment of buy–sell spreads in unit prices.
- Reducing differences in fee disclosure between superannuation and simple MISs.
- Improving the provision of fee information by issuers of underlying investment entities.
The Inquiry considers that innovative disclosure can improve consumer engagement and understanding, and that industry should pursue innovative disclosure and alternative forms of communication. The Inquiry endorses the ASIC pilot project and encourages industry to continue to engage with ASIC about forms of innovative disclosure.
The Inquiry is aware that commercial factors can work against creating more innovative disclosure. Although removing impediments may or may not provide sufficient incentive for industry incumbents to innovate, it may allow new entrants to drive different forms of disclosure.
The results from ASIC’s pilot should be considered when drafting new laws to facilitate innovative disclosure, including the findings from consumer testing within the pilot. Consideration should also be given to domestic and international research on the presentation of mandated information.
The Inquiry also considers improved disclosure of risk would assist consumers to make more informed decisions about financial products. Improving consistency of fee presentation would enhance allocative efficiency; for example, by promoting fee-based competition in superannuation.
The Inquiry recommends a self-regulatory, flexible approach to improving communication of risk and fees, allowing tailoring for different classes of products and avoiding prescriptive regulation, which would involve higher compliance costs. Industry should build on existing measures to improve consumer understanding of risk by including risk measures for investment products; for example, simple and non-simple MISs, securities and structured products. Industry should also consider examples of risk measures used in Europe and Canada. In developing risk measures, industry should consider:
- Whether a risk measure should be applied broadly across all classes of product.
- Whether there are more effective alternatives to risk measures, such as:
- Disclosure on relative expected or promised return against a well-regarded benchmark like the official cash rate.
- Tools that assist consumers to understand how products would be likely to perform in different market conditions.
- Prominent warnings about whether a product is leveraged and what this means for consumers if there is a serious market downturn.
Proposed measures should be consumer-tested to maximise their effectiveness.
38 A number of legislative provisions require issuers to provide documents and in some cases prescribe the format; for example, the Corporations Regulations 2001 for superannuation and simple managed investment products, the Corporations Act 2001 for prospectus requirements, and the National Consumer Credit Protection Act 2009 and the National Consumer Credit Protection Regulations 2010 for credit contracts and consumer leases.
39 For example, Susan Bell Research 2008, The provision of consumer research regarding financial product disclosure documents: Research report for the Financial Services Working Group, Susan Bell Research, Sydney.
40 Australian Securities and Investments Commission (ASIC) 2013, ASIC Stakeholder Survey, ASIC, Sydney, page 28. Survey conducted by Susan Bell Research, covering 1,468 stakeholders.
41 Financial Conduct Authority (FCA) 2013, Occasional Paper No.1, Applying behavioural economics at the Financial Conduct Authority, FCA, London, page 5.