“It’s been a long, a long time coming
But I know a change gonna come”
— Sam Cooke, A change is gonna come
2018 has been a good year for financial services lawyers and big consulting firms, but somewhat less enjoyable for banking executives.
Institutions confronted, at last, with the reality of transparency and accountability, seem to have been manoeuvred into a series of profound strategic changes.
These changes, which may be “entirely unrelated” to anything discussed at the Royal Commission, and which should not be interpreted as any sort of concession or admission, have seen some vertically integrated businesses separate their product manufacturing and distribution functions, address culture and management accountability and compensate clients affected by their cultural and compliance failures. Others stubbornly resist these trends and are popularly condemned for their choices.
These shifts suggest the possibility of broader structural changes and a move towards self-licensed and less-conflicted distribution. The possible structural realignment of the wealth management industry attracts a lot of attention, but I’d suggest that the tweaks being made to regulatory policy should be more interesting to advisers than the macro regulatory shifts.
“There has been too much reliance on individual disclosure at the point of sale as the answer to a whole host of market problems and failures.”
— Peter Kell, ASIC. 17 July 2018
On a practical level, the increased focus on trust, transparency and accountability signals the acceptance by the Government and the Regulators, that their focus on disclosure has failed to protect consumers from significant harm.
The Royal Commission has highlighted numerous examples demonstrating that effective consumer protection, and informed participation in efficient markets, requires a more active regulator and far less reliance on disclosure.
Advisers, and Licensees, need to acknowledge this new reality.
In asymmetric advice relationships, particularly those involving credence goods, the limitations of disclosure are obvious; disclosure doesn’t educate or empower consumers.
In fact, disclosure pacifies, distracts and deludes consumers.
In “The Burden of Disclosure: Increased Compliance With Distrusted Advice”, the authors found that
Although disclosure can decrease advisees’ trust in the advice, it can also increase pressure to comply with that advice if advisees feel obliged to satisfy their advisors’ personal interests. Hence, disclosure can burden those it is ostensibly intended to protect.
Understand the consequence of this research and the awareness creeping into the Regulator’s media releases. Disclosure often works to consumers’ disadvantage and conceals conflicts, misconduct and poor processes. Given these obvious limitations, should anyone be surprised that better alternatives are being discussed.
For context, I’d draw your attention to The Hon Scott Morrison MP’s recent address to The Australian British Chamber of Commerce and to Peter Kell’s speech at the ASIC Regulatory Update.
The limits of disclosure
“Disclosure can be ineffective for a number of reasons, including consumer disengagement, complexity of documents and products, behavioural biases, misaligned interests and low financial literacy.”
— Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018. Exposure Draft Explanatory Memorandum. 1.2
I’ve long argued that advisers’ over-reliance on disclosure was a poor strategy for dealing with regulatory and advice risks.
Although embraced as a panacea by licensees and advisers, disclosure has critical limitations – it can frustrate understanding, enable misconduct and increase risk.
Too often, disclosure is used to disguise the poor quality of an adviser’s reasoning or conceal their failure to act in their clients’ best interests.
Even good advisers struggle with the Regulator’s emphasis on disclosure knowing that it frustrates their capacity to produce clear, concise and effective advice.
Consumers abdicate responsibility either in reliance on their presumption that disclosed matters show their adviser’s interests are aligned with theirs or because of an implicit assumption that they’re protected from adverse consequences.
The most interesting development is that the Government and the Regulators seem to finally acknowledge these limitations. More importantly, they’re now proposing alternatives.
“As a Government we believe in personal responsibility, in fact we are counting on it. For the system to be fair and effective it depends on customers understanding, accepting and acting on that responsibility.”
— The Hon Scott Morrison MP
Less disclosure, more clarity
“ensuring customers get the information they need to make informed choices is both critical to a competitive market and critical for customers to get a better deal. And we are not just talking about more disclosure – we need better disclosure.”
— The Hon Scott Morrison MP
Lazy renovators use wallpaper to conceal flaws, issues and problems; some advisers use disclosure in the same way.
I’ve seen far too many examples of advisers using detailed and thorough disclosure to ‘excuse’ the significant harm their advice will inflict.
The erosion of superannuation, the loss of insurance the assumption of significant costs are not hidden from the consumers who’ll suffer the detriment, but often clearly stated in a dull and disengaging document that will neither be read nor understood by the client.
Whether they acknowledge it or not, too many advisers use disclosure as an alternative to prioritising their clients’ interests.
Great advice is a considered response that never loses sight of the client’s best interests or their informed engagement. It should be the unequivocal written expression of your expertise, education and ethics. It is your assurance to your client that you have considered their needs, exercised your personal judgement and divined a solution that will satisfy, or exceed, their needs and expectations. It is a statement of care, concern and consideration.
Unfortunately, some advisers act as though disclosure can, and does, excuse all their professional, process and ethical failures. It does not, and the unequivocal shift in policy is based on the recognition that disclosure does
“nothing for the customer but leave them in the dark and more dependent upon advice, or that just makes them walk away and say it’s all too hard.”
Not more, Better.
“One word, one letter, one line
And I’d feel a whole lot better”
— Baby Animals, “One Word”
The opportunity for Licensees and advisers is to seize this opportunity and rethink their approach to advice.
You’ll always have disclosure obligations but the Government and ASIC are urging you to rethink how you meet these obligations.
The unambiguous take-out for Advisers and Licensees is this – the substance, the structure and the comprehensibility of your advice matters far more than you appreciate. Disclosure will not excuse, invalidate or forgive conduct failures. Disclosures and disclaimers may reassure you but, where they undermine clarity and understanding, they provide no or little benefit.
In a regulatory regime that promotes trust, transparency and accountability, a smarter compliance approach is to ensure you interpret your formal disclosure obligations in accordance with these principles. In our view, it requires shorter, sharper and more relevant advice. To more effectively manage your regulatory risk, avoid the traditional mistake of relying on copious disclosure and expansive disclaimers.
The answer is not more disclosure, but better disclosure.
Start with your SoA template and cut ruthlessly. Remove anything that may frustrate your clients’ understanding or rationalise your choices and conduct.
As an adviser, your job is to provide your clients with the right information they need to make the right decision for them.
Look at each disclaimer, disclosure or warning included in your document, individually, and in the aggregate, and kill anything that distracts your clients’ focus or diminishes their likelihood of understanding your advice and its consequences.
Less Disclosure. More Clarity.
The need for intervention
“The evidence from the Productivity Commission is that customers are not in a position where they are armed with the right information to make the right decisions for them.”
— The Hon Scott Morrison MP
The failure of disclosure as a consumer protection mechanism is the reason why more active alternatives are required.
We’ve previously addressed Product Intervention Powers and the shift from passive and reactive regulation to active and interventionist regulation. It’s a pragmatic response reflecting international initiatives and responding to the FSI’s observation that ASIC could be more effective in reducing consumer harm if they didn’t have to wait for a contravention to occur.
The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 delivers the powers recommended by the FSI supported by a combination of civil and criminal penalties that allows ASIC (or the prosecutor) to take a proportional approach to enforcing the obligations.
The Bill advances ASIC’s ambitions beyond the gentle guidance of their “invest between the flags” approach and reflects the Government’s preference for an active, interventionist and feared regulator. Should ASIC identify, or anticipate, significant consumer detriment, the Act will allow them to:
- Ban a person from issuing a product or class of product to consumers
- Direct that a particular product or class of product only be offered by way of issue to particular classes of consumers or in particular circumstances
- Direct that a product or class of product not be distributed unless accompanied by an appropriate warning or label.
The Product Intervention Powers may be the most significant financial services reform of the past ten years and are likely to have a significant impact on product development and distribution. We’ll address the proposed powers separately but it’s more important at this point in time to appreciate that ASIC will become more active, more feared and more effective. In our view, that’s a compelling reason to embrace clarity and reduce your reliance on disclosure.
If you liked this, you may enjoy