October 15, 2019
A joint report released by Australian and Dutch regulators has spotlighted cases where financial services disclosure has been less effective than intended, ineffective or in some cases, backfired, contributing to more consumer harm.
The Australian Securities and Investments Commission (ASIC) released the report with the Dutch Authority for the Financial Markets (AFM) exploring the effectiveness of disclosure for financial products on consumer outcomes.
The report spans ten years of case studies across a broad range of financial products and services in Australia, the Netherlands, the UK and the US.
ASIC Deputy Chair, Karen Chester, says, “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.”
The reported identified key limits of disclosure supported by 33 case studies, which 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 found that these limitations are not confined to longer forms of disclosure, or traditional paper-based disclosure, but also apply to warnings and ‘simplified’ disclosure.
It’s not the ‘silver bullet’ once thought, nor should it be relied upon as one.”
“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 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.
Chester said that 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’, she said.
ASIC stated it will take a more consumer outcome-focused approach going forward.
“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 Chester.
Click here to read the report.