In a joint report published today, ASIC and the Dutch Authority for the Financial Markets (AFM) looked at the effectiveness of disclosure for financial products on consumer outcomes. The report covers a decade of case studies across a broad range of financial products and services in Australia, the Netherlands, the UK and the US. It finds that reliance on mandated disclosure and warnings has often proved ineffective, and at times even backfired contributing to more consumer harm.
'It's time to 'call time' on disclosure as the default consumer protection. It's not the 'silver bullet' once thought, nor should it be relied upon as one. Disclosure can and has backfired in unexpected and harmful ways,' said Deputy Chair, Karen Chester.
The report highlights that the limits of disclosure are not new. Once considered the backbone of consumer protection regulation in the (1997) Wallis Inquiry, disclosure's effectiveness has been questioned and discounted by both the 2014 Financial Systems (Murray) Inquiry and more recently the Financial Services Royal Commission (FSRC).
'The over reliance on disclosure in some ways proved an enabler of the poor conduct and poor consumer outcomes revealed by the Financial Services Royal Commission. Importantly, the Royal Commission represents more than a tilt away from disclosure. The overwhelming majority of the Commission's recommendations – over 50 – are about better firm conduct', said Deputy Chair Karen Chester.
'Our report highlights the need to rebalance the onus from consumers to firms – to become a shared responsibility. To do this, firms need to understand, measure and deliver on consumer outcomes', said Ms Chester. 'This aligns with the Royal Commission and the ensuing legislative reform program the Government has underway'.
The report also reveals how firms can work around and undermine disclosure. The report identifies unnecessary product complexity and 'sludge' that can get in the way of consumers switching products or making complaints. For example, in one of the 33 supporting case studies, only 2/5 of Australian consumers given a 'simple' key fact sheet (KFS) selected the objectively best home insurance product. Whilst almost 3/5 of consumers given the KFS or longer product disclosure statement selected suboptimal products.
'Put simply, disclosure has been asked to do too much. It cannot solve the complexity of the financial system. Especially when that complexity, in the form of thousands of barely differentiated products, is firm induced', said Ms Chester.
Going forward ASIC is taking a more consumer outcome-focused approach, making the most of our enhanced regulatory tool kit. This includes the use of our new product intervention powers (PIP) when warranted and setting expectations for firms to deliver good consumer outcomes under their design and distribution obligations (DDO).
'Ideally this report will be a must read for corporate Australia, especially financial firms with near term design and distribution obligations. These obligations have real potential to be a game changer for both firms and consumers. Firms meeting these obligations will also restore trust where they design and offer products and services that deliver value, not surprises, and are sold fairly. Recent 'sunlight' has demonstrated this is not only in the consumer’s best interests, but ultimately in the interests of firms that want to be consumer centric and better manage their non-financial risks.'
Mandated disclosure still has an important role to play. It contributes to market transparency and can enhance competition. But its value as a consumer protection tool cannot be assumed. 'The evidence shows that it is necessary but not sufficient', said Ms Chester.
ASIC has, over a number of years, questioned the 'myth' that if consumers are given mandatory disclosure documents, they will be sufficiently armed to protect themselves from harm. Now, in this report ASIC in collaboration with our Dutch counterpart – the AFM – spotlight the multiple cases where disclosure has been less effective than intended, ineffective or has actually backfired, contributing to consumer harms.
Key limits of disclosure identified in the report, and supported by 33 case studies, Include that:
- Disclosure does not 'solve' the complexity in financial services markets (8 case studies from Australia and the Netherlands about insurance, investments, financial advice and credit)
- Disclosure must compete for consumer attention and influence (12 case studies from Australia, the Netherlands, the US and the UK about credit, insurance, investments, superannuation and banking)
- One size disclosure does not fit all – the effects of disclosure are different from person-to-person and situation-to-situation (4 case studies from Australia and the Netherlands about investments, insurance and superannuation)
- In the real world, disclosures can backfire in unexpected ways (3 case studies from the Netherlands, US and the UK about financial advice, credit and investments)
- And a warning about warnings (6 case studies from Australia, the Netherlands, US and the UK about credit, financial advice and investments).
The report also identifies that these limitations are not confined to longer forms of disclosure, or traditional paper-based disclosure, but also apply to warnings and 'simplified' disclosure.